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Impact of high-frequency Quality Cost Control
Kaizen Institute
Catarina Stepanov Bukovac
Thesis to obtain the Master of Science Degree in
Industrial Engineering and Management
Supervisor: Prof. Tânia Rute Xavier de Matos Pinto Varela
Examination Committee Chairperson: Prof. Susana Isabel Carvalho Relvas
Supervisor: Prof. Tânia Rute Xavier de Matos Pinto Varela Member of the Committee: Prof. Amílcar José Martins Arantes
November 2018
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Acknowledgments
I wish to express my gratitude to Prof. Tânia Varela, for all the help and availability, not only to read my
work and propose improvements but also for the guidance and mentorship along this journey, that is so
important in my academic and professional life.
I would like to thank Kaizen Institute, especially to Rui Tenreiro and Alberto Bastos, not only for the
opportunity to do my internship and develop my master dissertation but for giving me the chance to do
so in a project abroad. I would also like to give a special thank you to Pedro Meira Ramos, for the
continuous support and friendship, since the begging of the work until the end. To my colleagues at
work, I also want to thank for the help and guidance in every step of the way. I would also like to give a
special thank you to Rui Palhais, that was an important support in this journey.
To my parents, a very special thank you, for the strength that they passed me and the continuous
support that they gave me. For all the patience, love and encouragement they provided and all the
opportunities that I had thanks to them. To my brother, a thank you for being there for me in this phase
of my life, and for always pushing me to be better.
I would like to thank all my friends, that were present since the beginning of this journey, for the support
and strength that they gave me to overcome one more step in this journey, that is so important to me.
Last, but not least, I want to thank and dedicate my work to my grandparents, Dusan and Dinka
Stepanov. For all the love that they gave to me and for always believing in me, giving me strength.
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Abstract
With the growing economy and development of new technologies, organizations must keep up with this
growing pace. Now, more than ever, it is important to reduce waste and costs. The markets are
becoming more competitive and there is no room for error. This is where, Kaizen appears, with Lean
methodologies, a map of the value chain of the company is made, and the value added of the company
becomes clear.
This dissertation presents a quality problem that is happening in Company X, a leader in the automotive
industry. There is a problem with scrap, where there has been a high number of products that have
been returned by the customer, because the specifications weren´t met, and there is no awareness of
the non-quality costs. The specific factory being studied assumes that rework steps are obligatory in
the process, this paradigm must change because it is a non-value-added activity.
With the support of Kaizen methodologies and study of researches already made in the quality field,
this dissertation aims to provide a method to solve quality problems and develop a quantification model,
that will allow top management to have a clear vision of the impact of the costs that this quality problem
and rework needed is having.
The final goal of this dissertation is that the factory gains knowledge of the impact of non-quality, which
will lead to a higher concern in solving the quality issues, and that there is a structured method that
should be applied in every project.
Keywords: Cost of Quality, Non-value added, Awareness, Problem Solving.
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Resumo
Com o desenvolvimento das novas tecnologias as empresas veem-se obrigadas a acompanhar este
crescimento. Torna-se crucial diminuir o desperdício e custos nas empresas. O Mercado torna-se mais
competitivo e não há margem para erro. Aqui surge o Kaizen com as suas metodologias Lean,
mapeando a cadeia de valor, tornando claro o que é de facto valor acrescentado.
Esta dissertação apresenta um problema de qualidade na Empresa X, líder no mercado automóvel.
Não só tem havido um número elevado de peças que tem sido rejeitadas pelo cliente, devido a desvios
nas especificações, mas não há qualquer conhecimento dos custos associados à não qualidade. A
fábrica que está a ser estudada, assume que etapas de retrabalho existentes são obrigatórias no
processo, este paradigma tem que mudar, uma vez que é uma tarefa de não valor acrescentado, que
consome recursos, tempo e espaço.
Com o suporte das metodologias Lean e análise de estudos já realizados no campo da qualidade, esta
dissertação pretende não só providenciar uma metodologia estruturada para resolver problemas mas
também desenvolver um modelo de quantificação de custos associados à não qualidade, que permitirá
à gestão de topo ter uma visão mais realista dos custos que estão a ser incorridos.
O objetivo final é que a fábrica passe a ter uma maior precessão do impacto dos custos associados à
não qualidade, e o impacto dos mesmos na fábrica. Com isto, é pretendido que passe a haver uma
maior preocupação em resolver os problemas associados à qualidade usando um método estruturado.
Palavras-Chave: Custos da Qualidade, Não Valor Acrescentado, Perceção, Resolução de
Problemas.
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Contents Acknowledgments ............................................................................................................................... III Abstract .................................................................................................................................................. V Resumo ................................................................................................................................................ VII Contents ................................................................................................................................................ IX Figures Index ........................................................................................................................................ XI Tables Index ....................................................................................................................................... XIII Acronyms List .................................................................................................................................... XV 1 Introduction ................................................................................................................................... 1
1.1 Problem Contextualization ...................................................................................................... 1
1.2 Dissertation Objectives ........................................................................................................... 2
1.3 Research Methodologies ........................................................................................................ 3
1.4 Dissertation Outline ................................................................................................................. 4
2 Case Study .................................................................................................................................... 5 2.1 Kaizen Institute ........................................................................................................................ 5
2.2 Company X .............................................................................................................................. 7
2.2.1 Hungarian Factory – Company X, Steel/Tube Factory ................................................... 9 2.3 Main Indicators of the Project (KPI) ...................................................................................... 16
2.4 Conclusion ............................................................................................................................. 17
3 State of Art .................................................................................................................................. 19 3.1 Quality Costing ...................................................................................................................... 19
3.1.1 Life Cycle Cost .............................................................................................................. 27 3.1.2 Conclusions – Quality Costing ...................................................................................... 28
3.2 Quality Cost Tracking Tool .................................................................................................... 28
3.3 Total Quality Management (TQM) ........................................................................................ 29
3.4 Conclusion ............................................................................................................................. 38
4 Preliminary Phase and Planning ............................................................................................... 39 4.1 Identification and Characterization of the Quality Problem in Kovomo ................................. 39
4.2 Chapter Conclusion ............................................................................................................... 49
5 Procedure Manual ...................................................................................................................... 51 5.1 Step by Step Implementation Process – Kovomo ................................................................. 57
5.2 Development of the Non-Quality Costing Tool ...................................................................... 61
5.3 Conclusions ........................................................................................................................... 67
6 Presentation and Analysis of the Results Obtained ............................................................... 69 6.1 Description and Presentation of the results .......................................................................... 69
6.1.1 Overall Savings ............................................................................................................. 69 6.1.2 Scrap Cost per Part Produced ...................................................................................... 69 6.1.3 Personal Cost Saving .................................................................................................... 70
6.2 Chapter Conclusions ............................................................................................................. 71
7 Final Conclusions....................................................................................................................... 73 8 References .................................................................................................................................. 75 Attachments ........................................................................................................................................ 79
Attachment A – Ishikawa Diagram ............................................................................................... 79 Attachment B – Step by Step Procedure, applied to Kovomo ..................................................... 81
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Figures Index Figure 1--Methodology used for Master´s Dissertation Development .................................................... 3 Figure 2- Company X presence Worldwide (Company X Website) ........................................................ 8 Figure 3- Company X´s Business Units .................................................................................................. 8 Figure 4- Revenue by Segment (Company C Website) ......................................................................... 9 Figure 5- Top 6 lines- Scrap level ......................................................................................................... 10 Figure 6- Current State vs. Target (Scrap Level) .................................................................................. 11 Figure 7-Savings per Production Line ................................................................................................... 11 Figure 8- Production Process................................................................................................................ 12 Figure 9- Model M ................................................................................................................................. 12 Figure 10- Jig Used in Shaping ............................................................................................................. 13 Figure 11-Client´s Engine ..................................................................................................................... 14 Figure 12- Kovomo´s Productivity ......................................................................................................... 14 Figure 13-Scrap Pieces ......................................................................................................................... 15 Figure 14- Defective Parts in Kovomo .................................................................................................. 15 Figure 15-Quality Cost Allocation ......................................................................................................... 21 Figure 16-Two-dimensional model of ABC [14] .................................................................................... 23 Figure 17-Fishbone diagram [36] .......................................................................................................... 34 Figure 18-SMED methodology .............................................................................................................. 37 Figure 19- 5W2H ................................................................................................................................... 37 Figure 20-Pareto of Scrap ..................................................................................................................... 40 Figure 21-Pareto of Reworked pieces .................................................................................................. 40 Figure 22-AB Product ............................................................................................................................ 41 Figure 23-Production Process (Kovomo) .............................................................................................. 42 Figure 24-Example1 .............................................................................................................................. 43 Figure 25-Example2 .............................................................................................................................. 43 Figure 26-Example3 .............................................................................................................................. 43 Figure 27-Jig used for Product AB ........................................................................................................ 43 Figure 29-5W2H for Excess Copper ..................................................................................................... 46 Figure 30-5W2H for Lack of Copper ..................................................................................................... 46 Figure 28-Ishikawa Diagram ................................................................................................................. 47 Figure 31-Methodology Suggested ....................................................................................................... 51 Figure 32-Priority Matrix ........................................................................................................................ 55 Figure 33-Step by Step Procedure - Kovomo ....................................................................................... 57 Figure 34-Ishikawa done with Company X ........................................................................................... 58 Figure 36- Poka-Yoke System .............................................................................................................. 59 Figure 35-Standard Work for Pasting ................................................................................................... 59 Figure 37-Results of the Testing Phase ................................................................................................ 60 Figure 38-Cost per Production Process ................................................................................................ 67 Figure 39-Overall Savings ..................................................................................................................... 69 Figure 40-Scrap Cost Saving ................................................................................................................ 70 Figure 41-Personal Saving Cost ........................................................................................................... 71
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Tables Index Table 1- Test Plan ................................................................................................................................. 59 Table 2-Implementation Plan ................................................................................................................ 60 Table 3- Machine Costs and Raw Material Costs ................................................................................. 64 Table 4-Production Cycle Characterization .......................................................................................... 64 Table 5-Input Variables ......................................................................................................................... 65 Table 6-Quality paths ............................................................................................................................ 65 Table 7-Quality Paths Kovomo May ..................................................................................................... 66
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Acronyms List KI- Kaizen Institute
CoQ- Cost of Quality
PoC- Price of Conformance
PoNC- Price of Non-Conformance
CoC- Cost of Conformance
CoNC- Cost of Non-Conformance
LCC- Life Cycle Costs
TFM- Total Flow Management
TPM- Total Productive Maintenance
TQM- Total Quality Management
VSM- Value Stream Mapping
TSM- Total Service Management
IDM- Innovation and Development Management
KPI – Key Performance Indicator
STD- Standard Work
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1 Introduction
1.1 Problem Contextualization
In the modern economic system, car manufacturers need to focus on the development of products that
will meet the customers’ expectations and fulfill regulatory requirements. In the more premium segment
of the automotive industry, this challenge, with all the competition that exists in the market, takes on a
different proportion. This industry is competitive because nowadays there are different brands that
present to the customer a high number of options. As a consequence of this broad choice, the industries
are forced to deliver the products with the highest quality possible, while not losing sight of the costs
associated with achieving it.
With all of this change, the organizations, now more than ever, have to be very efficient in delivering
what, how and when the customer wants it. Having this in mind, it is important that the companies
produce with the highest efficiency possible and with the lowest costs.
Company X is an Austrian Management Holding company that is well positioned in the market because
of its extensive portfolio of products and its presence in 38 countries around the world. It has three
divisions: Automotive, Steel/Tube and Distribution. Its aim is to be present in the entire value chain, by
being proximate to the customer and expanding into growing markets. There have been forecasts made
by the company that points to growth in the global market this year, by a rise of production volumes.
This specific project will focus on one specific plant in Hungary. The current situation in this plant is a
high number of rejection parts from the customer due to defects in the final pieces. There were months
where 90% of the pieces were rejected by the customer. Not only is this critical from the client´s point
of view, as this type of errors can affect the relationship established between Company X and the client,
but also because these quality problems represent a big cost to the factory. The need for a rework task
is now seen as an obligatory step, but this paradigm has to change quickly. These non-quality issues
are being measured by the number of parts that are being returned, but there is no awareness about
the true cost of this necessity to have some pieces being redone. This lack of knowledge of all the
parameters that are involved in non-quality costs is what triggered the need for this dissertation work.
A more detailed study should be made to assess all the costs that are being incurred in the production
process, in order to understand what production steps should be tackled. A related issue that has been
identified is the need to have a structured method of solving problems. Company X doesn’t have a
methodology to be applied when quality problems appear, which means there is no settled approach
that the employees should follow. This fact brings more complexity to a process that already isn´t easy.
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Nowadays, the company is facing a negative EBITA of approximately 2M€ and now more than ever it
is imperative that the costs are reduced if this plant wants to follow the growth of the production volumes.
Therefore, the challenge for this dissertation will be not only to try to provide a structured method to
solve the quality problems but also to develop a model that will quantify the costs that are inherent to
these quality problems.
1.2 Dissertation Objectives
The goal of this Dissertation in Master’s Degree in Industrial Engineering and Management is to apply
scientific concepts alongside with Lean methodologies, in order to help Company X tackle the recurring
quality problems and quantify the costs associated with non-quality.
In order to accomplish the objectives established, a study is made about theoretical concepts and
methodologies that will be the base for the development of the solution to the problem that is being
tackled. The companies involved in the development of the project will be introduced and described to
contextualize the case study. Having this in mind, there will be four main sections that will have the
following objectives:
• Description of the case study:
o Presentation of the company that provides consulting services- Kaizen Institute (KI).
o Presentation and description of the client company – Company X.
o Explanation of the current situation of the Company X, focusing on the problem to be
solved.
• Literature Review of concepts will be made, which will allow an evaluation of the state of the art
in the following topics:
o Quality Costing – in order to understand what studies have already been made in this
field, to support the development of the model that will quantify more accurately the
quality costs;
o Total Quality Management – so that a structured methodology for solving problems is
developed.
This section has the objective to explore and expand the knowledge of the two topics above
based on scientific articles or studies done previously.
• Application of the concepts acquired to the case study of Company X.
• Evaluation of the benefits gained with the proposed solution.
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1.3 Research Methodologies
In this section, the steps taken for the developing of this dissertation will be presented, which are portrayed in Figure 1.
Step 1- Problem Definition
The first step consists of understanding the current state of the company, regarding the quality problems
that are faced. A characterization of the quality problem has been made to understand more in depth
what is happening in the factory.
Step 2- State of Art / Literature Review
In the following step, a Literature Review is made for the problem in question. The Quality concept will
be studied and the tools that are available to quantify quality and non-quality costs. The objective of this
study is to define the best practices that can be applied to this case study.
Step 3- Data Collection
The third step consists of collecting and analyzing data to have a better understanding of the current
situation. An adequate methodology must be selected to collect the necessary data.
Step 4- Model Development
A model will be developed in order to quantify the quality costs that are being incurred. The final
objective of this model is to not only bring awareness to this topic but also to advance continuous
improvements in the company. The current quality problem of high scrap will be tackled, and the tools
and methodologies used will be the base for future problem-solving.
Figure 1--Methodology used for Master´s Dissertation Development
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Step 5- Analyze of results
The results of the previous step will be studied and analyzed to understand the real impact of the tool
that has been developed.
1.4 Dissertation Outline
Chapter 1- Introduction
Introduction to the theme of the dissertation work, statement of the objectives and definition of the
structure and methodologies used in the development of this paper.
Chapter 2- Case Study
A description of the companies involved in order to comprehend better the problem that is being tackled.
Chapter 3- State of the Art/ Literature Review
State of the art description based on Literature review about Quality and Quality Cost methodologies
and Total Quality Management methodologies.
Chapter 4- Preliminary Phase and Planning
In this chapter, a more detailed analysis is made in order to understand the origin of the quality problems
that are being faced.
Chapter 5 – Procedure Manual
A structured method for solving problems is presented, and the quantification model is developed and
introduced.
Chapter 6- Presentation and Analysis of the Results Obtained
After presenting and developing the methodologies, the results and benefits obtained will be described.
Chapter 7- Final Remarks and Future Development
The last chapter will summarize the results and insights arising from this project, and a direction for the
work that will be developed in the Dissertation will be given.
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2 Case Study
In this chapter, the companies involved in the realization of this dissertation will be presented. A brief
introduction and history will be given about the consulting company, Kaizen, and Company X, which
will be the focus of study.
The structure of this chapter will be the following: a presentation of Kaizen Institute will be made,
following by an introduction of their fundaments. Next, the presentation of Company X and its structure
will be presented. The factory where the case study is taking place will also be described in more detail,
and a line was selected to explain the production process. The main Indicators established to track the
benefits of the project will be presented. The Chapter ends with a conclusion about the case study that
is being analyzed.
2.1 Kaizen Institute
Kaizen Institute is a multinational consulting company founded in 1985 by Masaaki Imai in a Toyota
factory in Japan. The Kaizen headquarters are in Switzerland, but nowadays there are offices in every
continent.
The first office in Portugal was opened in 1999 in Porto. The Portuguese office is present in all economic
sectors, contributing to their development and improvement.
The projects that are being developed by Kaizen have specific actions for each sector, but there has
been a greater focus on the following sectors: Services, Retail, Industry, Health and Information
Technologies, R&D and Engineering. (Imai, 2012)
Kaizen is defined as a project of continuous improvement focused on results, by using multifunctional
teams, in order to reach the targets established in their own work areas. In general, these targets,
consist of time reduction overall steps of the process. The Japanese word Kaizen can be divided into
two parts, the first one, Kai, stands for “change”, and the second part, Zen, means “better”.
The founder, Masaaki Imai, in 2012, added three keywords that represent of the Kaizen philosophy.
(Imai, 2012)
1. Everybody: The only way, to ensure a good application of the methodologies is to involve
everybody.
2. Everywhere: Continuous improvement can be implemented in the whole company, starting
with the production lines and ending in higher departments.
3. Everyday: Kaizen methodologies as the word says, are continuous improvements, and should
be implemented as long as the company exists.
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Kaizen Institute follows a business model, that is organized into three categories (Imai, 2012):
• Implementation and Consulting
• Training, Education and Kaizen Events
• Benchmarking and Guided Tours
In order to support Kaizen’s vision of continuous improvement, there are five fundaments that are the
core of the business (Kaizen Institute, 2013):
I. Create Value for the client- The main goal is that at the end of each day the target is to
guarantee service level (Delivery) and quality. It´s important not only to focus on the quality that
is presented to the final costumer but also to make sure that the number of defects is
decreasing. The company should try to spend time only on tasks that will add value in the end;
everything that does not add value is considered waste. (Taiichi, 1988)
II. Eliminate Waste (Muda) – As stated before, all activities that do not add value to the client are
considered waste and should be eliminated. Muda in Japanese stands for waste, and Kaizen
Institute took this concept to another level by including two other terms: Mura, which stands for
variability and Muri, which means overburden. These three types of waste should always be
eliminated when possible.
III. Go to Gemba (the actual place)- As adding value to the client is the most important thing to a
company, going to the actual place where the value is added is something that Kaizen strongly
defends, not only for the operators that are working every day in the lines but for the whole
organization. It is in the Gemba where the problems will appear and where they have to be
solved.
IV. People Engagement - In order to succeed with the Kaizen strategies, it´s important that
everybody is involved, and everybody has an important role in continuous improvement. From
the operator to the CEO, everyone has their role in the company, and it´s important for everyone
to understand what is happening in every department of their company.
V. Visual Management- Sight is one of the senses that the human being uses more to obtain
information that is needed in everyday life. Sight should be used to highlight some of the existing
problems of some processes, but also to underscore what has been done as expected. By
having everything visual, it will make people interested in what´s happening around them.
As already explained, one of the principal fundamentals of Kaizen is to eliminate Muda, and in order to
do this, it is important to understand the concept of Muda and the several types that can be found. We
can classify Muda in seven different types (Melton 2005):
1. Errors and Defects – When in production, something is not produced with the right
specifications and has to be redone.
2. Over Processing – Processes that don´t add value to the client.
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3. People´s Movements – Excessive movements of people, which lead to time loss with no value
added.
4. Movements of Material and Information – the Excessive flow of material and information leads
to time lost in the handling and in the execution of the tasks.
5. Waiting for materials and information – stock that is put on hold.
6. Waiting for people – When a worker is, for example, waiting for a machine to finish in order for
him to unload and load the machine.
7. Excess of Production – Products that are made just to stock, with no guarantee that they are
needed. This Muda is the most important of the 7 because this waste implies all the others.
Kaizen Institute developed five methodologies that are represented by five pillars to put into practice all
the theories and concepts.
1. Total Flow Management (TFM)
2. Total Productive Maintenance (TPM)
3. Total Quality Control (TQC)
4. Total Service Maintenance (TSM)
5. Innovation, Development, and Motivation (IDM)
This was the presentation of Kaizen Institute, the company that provides consulting services. The next
stage is the description of the case study and Company X, the client. Consequently, Section 2.2 focuses
on the development of the case study from the client´s point of view.
2.2 Company X
This master’s dissertation is being developed in collaboration with Company X and Kaizen Institute.
Although Company X is globally recognized as a market leader, in terms of the automotive industry, the
Hungarian factory is facing a negative EBITA of 2M US dollars. This specific factory is not delivering
what is expected, since it is an older factory, built in 1984, and it has not been renovated ever since.
The factory is facing low production due to poor planning and a high percentage of scrap level, in
comparison to last year. This is the reason why this factory was selected for the development of the
Kaizen project.
Founded in 1876, Company X started as a shop in Germany, and it has grown into a company that is
nowadays present in 38 countries, with 28, 166 people in 170 different factories. The goals of the
business have always stood side by side with corporate responsibility. It has always been important to
use the knowledge acquired from past generations and combine it with a future vision of growth and
innovation in this industry. Since 1876 competences in metal-based products, automotive and
engineering sectors have been developed and improved.
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Company X started as a small shop, and it was not until 1916 that the first factory in Germany was
opened. Early on, the specialization in drawn tubes started, and in 1935 the first order for the automotive
industry was placed. An important step was taken in 1955 when the company started to produce its
own steel started, which was relevant for its growth.
The first internationalization was to the USA in 1980, with the opening of the first automotive factory.
Company X started to gain visibility in the automotive industry, which guaranteed them the first major
contract, where they produced the rear axle and suspension arms for Adam Opel. 1991 was an
important date because the specialization in prefinished components started and supply was made just-
in-time. From 2007 on Company X has started to acquire several factories all around the world and has
become the empire as it is known today. (Figure 2).
Figure 2- Company X presence Worldwide (Company X Website)
Company X is organized into three business units, as can be seen in Figure 3, and in Figure 4 the
revenue per sector is presented. (Company X, 2018)
Figure 3- Company X´s Business Units
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Figure 4- Revenue by Segment (Company X Website)
As can be seen in Figure 4, almost 80% of the revenue of Company X, comes from the Automotive
sector, this being the principal reason why a greater focus has been laid on the development of that
specific sector, and the Distribution and Steel/Tube sector are more behind in terms of development.
This dissertation will focus on a Hungarian factory, which belongs to the Steel/Tube division of Company
X. The factory and its production process will be explained in more detail in the next section.
2.2.1 Hungarian Factory – Company X, Steel/Tube Factory
Today the factory, with approximately 20,000 m2 of area, has a annual revenue of 70M euros and has
close to 500 employees. There are 15 project-based production lines, operating three shifts, with eight
hours each.
This specific factory has been struggling with quality problems. In comparison to last year, the scrap
costs have been increasing. There has been a high number of products rejected by the client, and this
resulted in a high amount of backlog, which now the factory must fulfill while delivering the normal
quantity established with the client. In addition, a lot of parts with defects are detected in the Quality
Control, which implies that the product must be sent back to Rework areas to be corrected.
Every line usually works three shifts:
• Morning Shift – 6.00am until 2.00pm
• Evening Shift – 2.00pm until 10.00pm
• Night Shift – 10.00pm until 6.00am
Every shift runs for 8 hours, and the operators have a twenty-minute lunch break, and two ten-minute
breaks. The number of shifts needed may change, depending on the customer´s orders or backlog that
needs to be fulfilled. Every line has different specifications and needs, so the number of operators varies
depending on its complexity. There are lines with only two operators, but more complex lines can have
up to 20 operators.
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For the purpose of the work that is being developed in this dissertation work, it was necessary to choose
one production line, to serve as a pilot for the present study. The objective at the end of this work is to
apply to all the production lines in this factory the approach matured in this dissertation.
A structured quantification model is needed for understanding what is the reason for the high scrap
level and what´s the path that the company should follow, in order to identify the critical problems and
solve them. The model that will be developed will quantify the costs that are being incurred and give a
clear picture of how quality is affecting the costs of the products.
Considering the 2M€ negative EBITA, it is imperative to reduce the scrap level and quality costs. The
choice of the production line that would serve as the pilot for this project was made through the 80-20
principle, by Pareto, that will be explained in more detail in the Literature Review.
For this analysis, Company X was requested to gather data about the Scrap level of all production lines.
After this data collection, and when the data from all 15 production lines was analyzed, a graph (Fig.
5) was built, focusing on the top 6 lines regarding Scrap levels.
The graph above, also known as Pareto, is a useful tool when there is a need to prioritize something.
In this case, there is a need to choose just one line among the six top lines in terms of scrap level. This
choice is relevant because this line will serve as an example to future projects and choosing a wrong
line can mean the failure of this project. By looking at the graph, it is clear that the Kovomo line is the
one with the highest scrap level, so it would be logical to choose that line over the others, as resolving
Kovomo´s quality issues will bring a bigger impact to Company X and more savings.
Figure 5- Top 6 lines- Scrap level
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0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
6,00%
Kovomo Auto A Auto B Auto C Auto D Auto E
SCR
AP
%
PRODUCTION LINES
Current State Target
Company X’s top management was questioned in order to understand what the goals of the company
were regarding the scrap level, and what the possible savings were for each line if a reduction of the
scrap level was achieved. In this situation, there was already a clear vision of what the target of scrap
level was for each line.
The following two graphs, Fig 6 and Fig 7, resulted from the discussion, having in mind the top 6 lines
identified above.
The graph in Figure 6,was built, after the current state of each production line had been identified, in
terms of scrap level percentage and a target state was defined with the top management of the
Hungarian factory of Company X.
Figure 6- Current State vs. Target (Scrap Level)
Figure 7-Savings per Production Line
-0.12%
-0.49%
-0.70%
-1.50%
-0.81%
-0.50%
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After defining the target state for each production line, the savings were calculated, in order to quantify
the gains that would be achieved. This analysis allows the understanding of which line would bring more
benefits to the project.
With all of the information above, it was clear that the Kovomo line should be the one to be tackled first,
as it is the one with a higher scrap level and that will generate higher savings for the company.
All the 15 based projects have similar modus operandi, as it can be seen Figure 8, which represents
the macro production process. The Kovomo line also follows these production steps, which will be
explained in more detail in this chapter.
The Kovomo line produces three types of products, AC, AB, and M. As explained before, regardless of
the product, every phase has to be performed in order to ensure a good quality product, that is delivered
according to the customer´s specifications.
Cutting
The process begins with steel tubes, that arrive at the factory, with a certain measure, depending on
the product that will be produced. This phase uses an automatic machine, that picks the tubes, and cuts
them into the right size.
Bending
After being cut, the tube goes to another machine, that will bend the tubes to fit the specifications of the
products.
Figure 8- Production Process
Figure 9- Model M
13
Welding
In the welding phase, different components are joined, with high enough temperatures to cause fusion,
but not high enough to melt the metal.
Manual Assembly
The final product is normally composed of different parts, that need to be assembled. Let´s consider
product M, for this specific product, three different tubes and some small pieces are needed, which will
be assembled by a machine, with an operator´s help.
Brazing
After the assembly of the final product is carried out, every piece has to go through a Brazing oven,
where a copper paste is inserted previously, and then go through the Brazing Process, which is similar
to the Welding process but this time with higher temperatures.
Shaping
Following the brazing process, comes a process that in the automotive industry is called Shaping. This
phase is a pure rework operation. This operation is needed because once the piece exits the oven, it
features a deviation. This deviation is corrected by a use of a tool, called JIG, as can be seen in Figure
10. This jig replicates the engine of the customer, where the final product will be placed. Once the piece
is put into the jig, and the operator sees that there are some misalignments, a tool similar to a hammer
is used, to align the tubes.
Leakage Testing
When the operator is certain that the product fits the client´s expectations, regarding the alignments of
the tubes, it has to be put through a Leakage Test. For this phase, a machine is used to test if the
product endures all the pressure that it will take when placed into the engine of a car.
Figure 10- Jig Used in Shaping
14
Quality Control
Making sure that the tube is exactly as the client wants it, is the most important issue for this industry.
There are deadlines that must be met and everything needs to have a 100% quality score. Therefore,
a final quality station before packing must exist. Here the operator uses an actual engine of the client
to test if the product is exactly as it is supposed to be. A visual check is also made, to make sure that
the tube doesn´t have any kind of defect or dirt.
Packaging
Finally, there is the packing station, where the final product is put into boxes and sent to the warehouse.
As it was mentioned previously, this specific plant is having a problem with production output as seen
in Figure 12. The red line represents the baseline of production and the green line represents the
target of production established for the Kovomo line.
Kovomo line, like all the other lines in the plant, have been struggling, in producing according to the
target established, as can be seen in Figure 12, because of the increase in scrap level, as is seen in
Figure 13, which represents in five months the scrap generated, compared to the average of 2017.
Figure 11-Client´s Engine
Figure 12- Kovomo´s Productivity
15
1%
6%
10%
8%
0%
2%
4%
6%
8%
10%
12%
0
20
40
60
80
100
120
140
160
180
W28 W29 W30 W31
Nº
De
fect
ive
Par
ts
Weeks
Defective Parts %
Figure 13-Scrap Pieces
Figure 14- Defective Parts in Kovomo
By analyzing the graph above, it is evident that Kovomo is producing scrap above the average reached
in 2017, and that the scrap problem is aggravating.
Another data collection was made, to understand better the current situation, in what scrap level is
concerned. The engineering team, responsible for this specific line, was asked to check the output of
the line, in order to categorize parts in OK parts or Defective parts. With this information, the following
graph was built (Fig. 14):
16
By analyzing the graph above, a high variability in the process is evident, which brings more force for
the need of this quantification model.
2.3 Main Indicators of the Project (KPI)
With the goal to create a system that enables tracking and evaluating the results that were obtained
with the work that was developed in this dissertation in Company X, two-time horizons were defined
where the actual measurements were made. These two horizons are:
1. Beginning- When the Kaizen project began with Company X. This stands for the time when no
alterations had been made in the factory; it was the current situation of the Hungarian factory,
as described in Chapter 2.
2. Final – At the end of the Kaizen project, after the development and implementation of new tools
and methodologies.
This dissertation began with observations of the current situation of the Hungarian factory, more
specifically, the production lines, with the goal to identify opportunities for improvement. This initial
observation was made with the help of employees of Company X and with data gathered from the
information systems, namely the management software of the company, SAP.
When this dissertation started, in February, the Kaizen project in Company X had already started, and
some results and observations had already been made. At the beginning of the project, it was necessary
to understand what the critical areas in the factory were, so as to understand what the projects should
focus on. After doing a Value Stream Mapping, three workshop packages were identified as needed:
I. Productivity
II. Quality
III. Logistics
Each one of them, had an important role, in eliminating the EBITA.
Benefit tracking is a very important aspect in these types of projects, it is crucial to track the evolution
of each project and comprehend what is the impact that each project is having, in what savings are
concerned. Even though this dissertation is regarding the quality department problem, it is relevant to
understand what is happening in the entire factory. Even if, there are three different work packages,
they are all linked and affect each other.
17
The following indicators where defined, in order to track the benefits and savings of the overall, because
they were identified as crucial for the factory and for the Kaizen projects. All of the indicators listed
below will be affected by the projects that are being developed.
• Overall Savings
• Personal Cost Saving
• Scrap Cost Saving
It is relevant to mention that the Hungarian factory is dealing with several issues that will be reflected in
the indicators. The factory is facing a negative EBITA due to several aspects, the productivity has been
decreasing and the orders of the customers aren’t delivered. This causes a high level of backlog, which
means that each day that the client doesn´t get the amount that was asked for, it goes to a backlog list
that will have to be satisfied. The issue with this backlog list is that since the productivity isn’t 100%, the
backlog amount is always growing. The big consequence of this is that instead of the orders being
shipped Tuesdays and Fridays as usually, they have to be released as soon as a certain amount is
reached. These shipments are much more expensive than the normal ones. On top of all of these
factors, the factory is facing quality problems in almost every line.
In this project developed with Company X, there were three important aspects that the top management
was concerned about regarding Quality:
o Scrap Cost Saving
o Overall Saving
o Personal Cost Saving
2.4 Conclusion
In this chapter, the entities involved in this dissertation were presented in more detail, to allow a better
understanding of the case study presented. On the one side, we have Company X, an automotive
industry player, which is a market leader, but it is facing some quality problems that are the basis for
this dissertation. On the other side, the Kaizen Institute is the consulting company that provides
continuous improvement consulting with Lean methodologies.
After analyzing in more detail the Hungarian factory, some gaps were identified. Considering that, on
average Kovomo line should have a 5% scrap level, and that Company X has a target of 3.5%, in order
to have 33 000€ savings, it is evident that the line isn´t operating as it is supposed to, once in these four
weeks, there was an average of 6.5% scrap level.
Another alarming situation is that there is no method to quantify the costs that are being incurred. Top
management doesn´t have any knowledge of how much the quality problems are harming the business.
A big paradigm was also identified, rework stations are present all over the factory. Instead of solving
the quality problems, quality gates are being settled in order to correct the problem. The issue with this
18
strategy is that the real root cause isn´t being solved, and the results of this are the recurring quality
problems.
Alongside this fact, Company X doesn´t have a structured method to attack the quality problems that
have been recurring in the past months. There is a need to develop a method to support top
management in solving these types of problems and this is the goal of this dissertation.
The limitations in this case are clear: there are no methodologies that enable the organization to tackle
the quality issues in the production lines, by identifying them, understanding the root cause and finally
solving the problems. There is also a lack of awareness with regard to quality costs, which means there
is no proper quantification of these costs.
The literature review that is made in Chapter 3 will address the limitations that were identified. Scientific
articles and studies will be investigated in order to develop a structured method for problem-solving and
provide a model for quantification of quality costs. The literature review will be based on Lean
methodologies and Quality Costing since these are the two main topics of this dissertation.
19
3 State of Art
The aim of this section is to, based on a literature review, clarify concepts and methodologies, that are
relevant, as a response to the limitations that were found in the case study presented in the previous
section. As already explained, the main problem of Company X is that there is no awareness of the
costs associated with quality and existing quality problems. With this in mind, some scientific articles
and studies were analyzed to allow a better comprehension of this topic.
The Literature Review will be concluded with the presentation of some comments regarding the topic
developed.
3.1 Quality Costing
In 1945 Armand V. Feigenbaum of General Electric introduced for the first time the concept of quality
costing, by developing a dollar-based system that would report the costs associated to quality, which
nowadays is known as Costs of Quality (CoQ). Four categories were defined with regard to quality
costing (Feigenbaum, 1956):
• Prevention
• Appraisal
• Internal Defect
• External Defect Cost
Following Feigenbaum’s studies, Philip Crosby was another contributor to the development of quality
costing. Cutting the COQ (1965), a book published in 1965 focused on the explanation of different
measurements used for developing prevention activities. Crosby wrote the second book, Quality is Free
(Crosby, 1979), where it was emphasized that there should be no extra cost when the company is
aiming to produce quality products. At this stage, Crosby was aligned with the four categories of costs
that Feigenbaum defined, but in 1984 there was a simplification to two categories(N.M. Vaxevanidis, G.
Petropoulos, J. Avakumovic, 2009) :
• Price of Conformance (POC)
• Prince of Non-Conformance (PONC)
In 1998 the Juran Quality Handbook (Juran, 1988) came out with a different perspective on this concept.
After several studies, Juran understood that the PAF should not only include activities but also the
indirect costs associated with products produced with defects. The following costs were considered:
• Tangible factory costs- scrap, rework and inspections
• Tangible sales costs- handling customers
• Intangible costs- loss of customer goodwill, delays in deliveries
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Harrington developed a study where it was concluded that if some investments were made in prevention
activities, the percentage of non-quality would decrease, and there would be a reduction in the cost per
piece. (Harrington, 1987) Further studies and analyses were performed and it was concluded that the
quality costing system has to include not only direct costs but also indirect quality costs. (Harrington,
1999).
Laszlo in 1997 made a link between quality costing and Total Quality Management (TQM). A study was
carried out that highlighted the importance of quality costing when trying to implement TQM. In fact,
quality costing provides a system of monitoring the relevance of the projects that are being developed
within an organization. An improvement project should have a decrease in quality costs if it is done
effectively. (Laszlo, 1997) An explanation of Total Quality Management (TQM) will be given in the next
section.
When a company is trying to improve quality levels, it is important that tracking is made regarding the
costs associated with quality, because the objective is not only to deliver what the clients expect but
also to do it with the lowest cost possible. To achieve this reduction of costs associated with quality,
they first need to be identified and measured. In fact, if the organization´s goal is to achieve quality
excellence, the costs of quality should be measured and reported. (Schiffauerova, Thomson, Omar, &
Murgan, 2006) In order to collect quality costs, a framework to classify the different types of costs is
needed. Although there is no fixed definition of quality costs, what usually is considered is the sum of
conformance plus non-conformance costs.
• Conformance costs: costs that are made in order to prevent poor quality, such as product
inspection.
• Non-conformance: costs are the costs incurred when there is a defect in the product, and there
is a need for rework or even return.
All in all, there is an evident link between quality and costs, and therefore the quality management
system should be connected to the system that monitors the costs of quality. Unfortunately, in many
organizations, this link doesn´t work as it should. (Weinstein, Vokurka, & Graman, 2009)
It is safe to conclude, that controlling quality principles is related to total quality management, and
therefore, monitoring and controlling costs of quality should be a tool that supports the Total Quality
Management (TQM) methodology. (Lari & Asllani, 2013)
In the past years, models for quality cost have been developed, and today there are five different
categories, P-A-F, Crosby´s model, Opportunity Cost Models, Process Cost Models, and ABC models.
A more detailed description of each model will be given, for a better understanding.
21
Feigenbaum differentiated quality costs, in prevention, appraisal, and failure, and this is what today is
known as PAF model. (Feigenbaum, 1956) This classification has been accepted worldwide as a model
for quality costing. In this model, the costs are described in the following way:
• Prevention Costs- gather all the costs that are incurred when the design, implementation, and
maintenance of the total quality management system are carried out. These costs are planned
to happen, even before the production process happens.
• Appraisal Costs- all the costs related to ensuring that the customer and supplier are satisfied
with regard to conformance to requirements.
• Internal Failure Costs- when the product is not produced with the customer´s requirements,
rework must be made.
• External Failure Costs- products or services that fail the customer´s requirements but are only
detected when transferred to the client need to be covered externally.
There is a correlation between these four types of cost categories, that can be seen in Figure 15
(Giakatis & Rooney, 2000):
This model defends that it´s better to ensure prevention and appraisal costs, in order to avoid further
investments in failures. (Plunkett & Dale, 1988). The P-A-F model, that Feigenbaum´s and also Juran
advocated, was adopted by the American Society for Quality Control and has been used by most
companies that work with quality costing. (British Standard, 1992)
Even though the PAF Model is the most common costing model, unfortunately, it is still not able to
integrate the costs associated with quality and the benefits resulting from quality improvements because
the prevision of future returns is not possible. (L.J. Porter & Raynor, 1999)
Figure 15-Quality Cost Allocation
22
This model provides a guide for the identification of costs, consisting of the following steps, according
to the British Standards Institute (British Standards Institute, 1981):
1. Calculation of the costs that are directly related to quality
2. Calculation of the costs that are indirectly related to quality, but should be considered when
measuring the total cost incurred in quality
3. Identification of internal costs, which resulted from failures in the production process
4. Identification of the costs related to failures, after there was a change of ownership.
The principal limitation of this model is that even though it provides a tool for measuring quality costs,
which can be used as a strategic tool by top management for improving processes, it doesn´t provide
a direction for the improvement. (Giakatis & Rooney, 2000)
On the other hand, the definition of quality for Crosby is the “conformance to requirements”, and
therefore, the cost of quality (CoQ), is the sum of the price of conformance (PoC), and price of non-
conformance (PoNC). (Satanova & Sedliacikova, 2015) The definition of the price of conformance
stands for all the costs that are insured in order to be certain that the product is immediately produced
according to specifications. These costs will include the prevention and appraisal costs. On the other
hand, the price of non-conformance is the sum of all expenses made when the product has some defect
and needs to be corrected; it takes into consideration the cost of rework and scrap.
Process Cost Model has the particularity of emphasizing the measurement of process cost. Similar to
the Crosby model, cost of conformance (CoC) and cost of non-conformance (CoNC), are taken into
consideration, but this time linked to a process. By using this model, more relevance is given to the
processes, and the organizations become more aware of the concept of quality costing.
With this in mind, the cost of conformance is the cost of the actual process that will produce the desired
product with the right specifications. On the other hand, the cost of non-conformance is the cost
associated with the process that is not delivering according to the standards. (Leslie J. Porter & Rayner,
1992) With this definition, we can establish some similarity between this model and the Crosby model,
but there are different points of view.
Process Cost model can be applied to any process in an organization. To ensure that the model is
correctly applied, the following steps must be taken into consideration:
1. Elaborate a flowchart of the overall process- all the activities and parameters within the
organization will be identified
2. Categorize the activities as CoC or CoNC- the cost of quality at each phase is estimated.
3. Study the opportunities
4. Define next steps - where some improvements will be implemented, by redesigning the
processes and investing in prevention, in order to reduce the CoNC and CoC.
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Although the PAF model and Process Cost Model are the most common approaches, they still don’t
provide methodologies to include overhead costs in cost of quality systems(Tsai, 1998). The ABC
Model comes as a response to this weakness. This model was studied and developed by Cooper and
Kaplan at Harvard Business School (Cooper & Kaplan, 1992).
The ABC methodology is broken down into 2 stages. The first stage is to understand the monetary
value associated with various cost objects (such as departments, products, customers, and channels)
and tracing resource costs (including overhead costs) to activities. The second stage is to then trace
the costs of activities to cost objects. (N.M. Vaxevanidis, G. Petropoulos, J. Avakumovic, 2009)
The traditional costing models usually distribute overhead costs by using allocation based on volumes,
such as direct material costs or labor hours. The disadvantage of the ABC method is the distortion of
the product´s cost. For products with a high volume, it will overcost them, on the other hand, for products
with low volume it will undercost them.
Cooper and Kaplan suggested that this methodology is used to enhance the accuracy of the products’
costs. The first approach focused on trying to assign with the highest accuracy possible the overhead
costs to the products presented a weakness: the costs that occurred outside the organization weren't
taken into consideration. After more studies, a new ABC model was proposed, this time two dimensions
were present, the cost assignment and the process view. (Tsai, 1998) To facilitate the understanding
of these two subsystems, a scheme is presented in Figure 16. (Kumar, Shah, & Fitzroy, 1998)
After this model was proposed in 1988, an important statement was released: costs and information
gathered by ABC system will help to clearly identify the quality of improvements that can be
implemented and also plan a continuous improvement(Tsai, 1998).
All in all, after analyzing the main Cost of Quality (CoQ) models, and the ABC model now presented, it
can be concluded that the PAF model is an approach of quality costing that is activity-oriented, whereas
Figure 16-Two-dimensional model of ABC [14]
24
the Process Cost model is process-oriented, and finally the ABC model combines both views in one
single model.
Quality Costing is not a tool exclusively for measuring costs; it has an important role in showing to top
management the need for improvement projects. The biggest impact for the managers of a company is
when data is expressed in monetary terms. Having the percentage of scrap level doesn´t have enough
impact and it will not trigger the need for improvement, On the other hand, if it´s known that the company
is losing thousands of dollars because of quality problems, this will definitely bring an urgent need for
change. Once the commitment of top managers is achieved, they will have an important role in the
success of Total Quality Management (TQM) initiatives.
In fact, quality costing will work as a link between the production line and top management, because it
translates the data gathered from the line into language that is very familiar to the managers. It will
provide a tool for measuring efficiency and effectiveness of the quality activities present in the
organization. Another big advantage of quality costing is that it forces the company to evaluate the
performance of the entire company in terms of quality. It provides a clear picture of the organization´s
situation and the need for improvements to reduce costs. In case there is no quality system already
implemented, quality costing can be a great starting point to implement it.
Different studies about quality costing were been undertaken by Crosby, Deming, and Juran, and each
one had a different assessment of this matter. (Oliver & Qu, 1999) Crosby believed that the need for
the development of quality costing is not for managers to control, but the whole organization must
understand the quality concept, and this understanding is achieved by measurements. On the other
hand, Deming defended that measuring and analyzing costs of quality is a mistaken waste of time, and
it provides only an evidence that the problem wasn´t understood. Juran, being the most popular
approach, stated that the measuring of costs is an important tool for managers.
The remarkable evolution in terms buyer´s power has become evident in the industry. Before we had a
customer that had to deal with production times of factories. If a car was ordered, it had to be paid in
advance and the customer had to wait for months or years to have the car.
Nowadays, it´s totally the opposite: there is more than one company that sells cars, so the customer
has a choice, and when the choice is made the car is immediately delivered.
We have gone from a market where the demand was higher than the supply and the industry had all
the power, to a buyer´s market today, where the supply is higher than the demand, therefore the
customer has all the power. (Kärnä, 2004)
Crosby had already given a definition that quality is Conformance to Specification, but Yasuthosi
Washio, when addressing to National Institution for Quality and Reliability in 2015, said quality should
be described as Conformance to Requirements. The focus should be on what the clients want and how.
The perception that the customer has of quality is different from the company´s perspective. There are
25
some points that need to be considered when evaluating the client´s point of view (Sheikholeslam &
Emamian, 2016).
• Performance: defined as “Fitness for use” by Juran, performance is the reliability to serve the
client´s purpose.
• Features: everything that is an extra to the primary characteristics
• Aesthetics: this is the visual component, how the product looks when delivered to the customer
• Durability: the product should not only meet the customer´s requirements and specifications,
but it should have the longest life possible without failures, or if small failures occur the customer
should be able to solve the problem without having to contact the company services
• Serviceability: after the product is purchased the customer has access to some services;
serviceability is what measures the quality and speed of this services
• Warranty: it´s the guarantee that is given to the customer: for a certain part of the lifetime of the
product, the customer has access to services to repair the product if needed
• Reputation: this concept stands for the brand that the company creates in the eyes of the
customer, and it is what gives the customer the confidence to buy one particular product and
not another one from a different brand
• Price: this is always a relevant point to the customer; the lowest price is always preferred, but
without harming the product´s quality.
In short, the customer´s satisfaction plays a big role in the strategy of the business. Managing the
satisfaction of the client is extremely relevant, and therefore, there should be established indicators
that will allow to track it and act on time if needed.
The best way to measure quality is by analyzing the cost of quality that results from the costs incurred
by nonconformance problems. Philip Crosby defends that all the costs that arise in addition to those
that would arise if the product was produced in perfect conditions are considered the quality costs due
to nonconformance.
When companies face high levels of scrap level, the usual reaction is to hire more labor to inspect all
parts, in order to guarantee that only products with 100% of quality are delivered to the client. But this
will not completely eliminate the scrap level and the costs due to quality will still remain high.
It was in the 1950´s that the cost of quality first emerged, the concern that quality should be improved
and that the costs associated with it should be reduced. These costs do not take into account the costs
of producing the products but also all the indirect costs, the costs of losing customers due to poor quality
products and costs of losing market share.
26
Juran also studied quality and defended that there are four aspects that lead to the concept explained
above:
i. When there is a growth in the complexity of the products, a bigger precision is required and this
will result in the growth of the quality costs
ii. There is a greater need for products with a longer lifetime, which will result in higher
maintenance costs to ensure that the products keep their original features as long as possible
iii. The necessity of top management to express the quality of monetary values results in the need
to hire quality specialists that will present their studies and recommendations in the common
language: money
iv. Having higher quality and ensuring a longer lifetime sometimes can have the downside of
having bigger costs associated with the product
As presented in section 3.1, quality costs can be divided into three types of costs: Prevention, Appraisal,
and Failure (PAF model). There can also be a more general categorization. There can be internal failure
costs, which represent all the costs that are usually discovered in the development and testing. Below
are the costs that are known as internal(Kiran, 2017a):
o Scrap – the loss that is encountered when there are defective parts
o Rework- the cost of having a process to fix the error in the product
o Retest- after doing the rework the pieces needed to be retested, and a cost is implied in
this step
o Downtime- when a defect is found, the machines have to be stopped to encounter the root
cause of the problem. This downtime has also a cost because it is time that should result
in production.
o Yield losses- when there is an increase in work time due to inefficient control operations
o Disposition- when nonconforming parts are found, it should be verified if the parts can be
reintroduced again in the process.
External costs are the ones that are found once the product has already left the factory for the client:
o Complaints
o Warranty Costs
o Recall costs
o Concessions
o Loss of Sales
o Litigation
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3.1.1 Life Cycle Cost
Life Cycle Cost represents a method used in cost management, with the purpose of evaluating all
economical trade-offs that occur during the life cycle of one product. (Bierer, Götze, Meynerts, &
Sygulla, 2014)
This analysis allows to evaluate in an economic point a view different alternatives in a process. (Okano,
2001) All the costs associated with a process are assessed, by looking at the product´s life, from cradle-
to-grave. (Peças, Ribeiro, & Henriques, 2009a) With this vision, all costs are taken into consideration
when calculating the cost, since the research and development until costs associated with the final
customer. (Okano, 2001) What happens in most cases, is that some of the costs are not expressed in
the price given to the market, as for example costs incurred during disposal phases. (Peças, Ribeiro, &
Henriques, 2009b)
If the overall life cycle of one product is analyzed, and all the costs are taken into consideration, the
final cost will be the sum of the all different parameters that are inherent to the several stages of a
process. Each stage includes different materials used, several types of equipment, labor, energy, and
waste are generated. (Folgado, Peças, & Henriques, 2010)
It is important to refer, that this is not a standard analysis, there are several approaches that can be
made, using different methodologies and scopes. A guide for Life Cycle Cost analysis was proposed
by Greene and Shaw (1990), which gave principle for this analysis, and various authors have used it in
their studies. (Greene & Shaw, 1990)
General steps for this analysis where defined:
1. Characterization of the object of study
2. Definition of boundaries of the life cycle
3. Development of the costing model
4. Gathering of data
5. Evaluation of the veracity of the results obtained
6. Discussion of the results
To summarize, this tool can be used when evaluation and comparison are needed, it will support the
decision of a set of alternatives, based on the most effective solution in what costs is concerned. The
goal is the support of the decisions based on the costs that are incurred, taking into consideration all
the stages in the life cycle of a product. It can be applied for cost evaluation, as well as designs
processes and to compare strategies. (Bierer et al., 2014)
28
3.1.2 Conclusions – Quality Costing
In order to improve the quality of a company, the costs have to be measured and analyzed, so that the
opportunities appear, and the next steps are defined. This concept is relevant because the final goal of
a company is to not only deliver the product according to customer´s specifications but to do so with
the lowest cost possible. This mindset matches the objectives of Total Quality Management, which also
focuses on eliminating waste in order to improve processes. Having the data analysis of the real quality
costs will be a fundamental tool for Total Quality Management.
Even though there is a high number of papers published on the importance of quality costing, there are
just a few organizations that use these methods.
As concluded before, quality costing is not only important for top managers because it gives them a
clear view of the quality department in values they understand well, but it also helps to identify and
select improvement projects that need to be done at an operational level. (Evans JR, 2005)
Although the PAF model is the one that has higher recognition internationally, it is mainly a model for
categorizing costs and has some serious limitations. Because of this, the model isn’t the most suitable
for the Total Quality Management system and Process cost model should be used instead.
Another important aspect was the one approached in section 3.1.1, the Life Cost Cycle, which gives
the importance to look to the costs of a product from cradle-to-grave. There are many costs along the
production process that are not always took into consideration.
Finally, there are several studies to confirm the relevance and the usefulness of these quality costing
methods. The methods provide not only a tool for controlling quality systems but also bring awareness
to the need for continuous improvement, which is related to the limitations encountered in the case
study. Despite all of these facts, the cost of quality is still not an extensively used concept. (N.M.
Vaxevanidis, G. Petropoulos, J. Avakumovic, 2009).
3.2 Quality Cost Tracking Tool
As explained in the previous section, there are some limitations to the models presented in there: it is
still difficult to identify at an operational level the costs associated with quality. There are the traditional
costing models, but simulation could be used as a better solution for the monitorization of costs. What
normally happens in manufacturing plants is that there is an operator that is responsible for the quality
inspection. By doing quality control with self-inspection, an instantaneous feedback is provided, and an
immediate improvement can be made. The problem with this method is that there is still room for errors.
A simulation model could be developed to try to understand the errors that are being made and that are
resulting in an increase in quality costs.
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With the case study of Company X and the Hungarian plant in mind, in the production process, there is
the self-inspection mentioned above. Following the assembly of the parts, the product passes through
a Shaping workstation, where the operator has to check if the product is according to the requirements;
if not, there has to be rework. By having this station, it is guaranteed that there is an intermediate step
where the quality is checked. The advantage of this step is that it allows an earlier acknowledgment of
a possible defect. However, it is not 100% reliable, because this inspection relies on the common sense
of the operator. Shingo recommended that there should be further tools to support this control. Either
an adoption of some physical way to measure the conditions or an automatic system to do the inspection
(poka-yoke). One of the limitations of traditional costing models is that this inspection error isn’t
considered, even though these errors have a significant impact on outgoing quality. Some models
consider this type of error, and there are two types of errors:
• Type 1 error – when a good part is mistaken for a defective part
• Type 2 error- when a defective part is mistaken for a good part
In a study developed by Ballou and Paperan investigation was carried out on the specific effect that
these types of errors have in different environments of production. The discovery was that
environments with higher penalty costs or a higher probability to produce defects have a higher
sensitivity to inspection errors. (Ballou & Pazer, 1982)
Shingo proposed in his study that every time a defective part is encountered, the operator should try to
understand the reason behind this error. The problem with this assumption is that the root cause is not
always random, and sometimes the occurrence of errors is high. In this case, the operator would have
to constantly interrupt the production process to analyze the problem, generating significant downtime.
There was a study done by Sinclair, where an operator was observed during inspections. The discovery
was that the operator would stick to the control regime installed, without questioning the effects of the
costs. (Sinclair, 1978) There is an important aspect that needs to be well present: every defect
represents an opportunity for improvement, where the operator has to understand the error that leads
to the defect.
There needs to be a clear vision of the effect of the quality controls and the effect of quality costing. A
model for the industry should be developed to facilitate this process, and this is where the motivation of
this dissertation arises from.
3.3 Total Quality Management (TQM)
As discussed previously, the limitation of the case study is quality: not only is there no quantification of
the costs associated, but there also no efficient methodologies and tools to solve the high level of scrap
and the costs associated with it. The development of a tool that will quantify the costs will be useful to
bring awareness to this topic, but there is a need to decrease the scrap percentage, and here is where
the Total Quality Management methodology comes in.
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In order to understand the TQM philosophy, it is important to comprehend the quality concept is. As
already discussed, quality is the capability of a product to fully satisfy the requirements.
The quality concept not only comprises the design of the product and its conformance, but also the
customer´s needs and the support that it may require through the lifetime of the product. With this
concept in mind, Total Quality Management (TQM) consists of the principles, methodologies, and tools
that will allow the implementation of a system that will focus on continuously improving this ability to
fulfill the client´s requirements. (Garvin D., 1988)
Taguchi defined quality as the conformance of the product to its final requirements with a low deviation
that may occur. On the basis of this, the Taguchi Loss Function was developed, which represents the
variation of the scrap parts that lead to costs. These costs can be originated from production,
malfunctioning, the need for maintenance, repair, redesign or rework. What this function came to
underline is the need to think about the quality of the product before production. It is mainly from the
design stage that the quality deviations originate. (Eia, 1998)
Taguchi´s loss function gains a lot of credits because it increases the focus on continuous improvement
in organizations. Taguchi´s design strategy follows three stages:
1. System Design- this can be known as the conceptual stage for marketing and engineering
2. Parameter Design- in this stage, the detailed design begins. Values are attributed to dimensions
and design parameters need to be set. It is an important work of analysis, in defining how the
final product should behave compared to the parameters established and considering a balance
between cost and effectiveness.
3. Tolerance Design- the final stage consists of the reduction of the variations in the critical
dimensions.
Even if the broad tolerance is specified when the design stage is taking place, it doesn´t mean that the
rejections will be lower in the manufacturing stage and this is where Taguchi made a significant
difference, by pointing out the importance of continuous improvement, in order to make sure that, in the
future, the losses due to dissatisfaction of the customer don’t increase.
As it was emphasized before, Kaizen represents a continuous improvement, and it cannot be compared
to innovation because innovation stands for an improvement made in one exact moment, and not
something that has continuity.
Continuous improvement has been the stamp of TQM, and it´s present every day and everywhere.
Juran in his book strongly defends that continuous improvement was what made the Japanese
industries thrive and in order to implement this philosophy, eight steps were defined (Juran, 1988):
1. Proof of need: the problem has to be identified
2. Diagnosis organization: establishing the tools to be used
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3. Diagnosis: the root cause must be found
4. Breakthrough in the knowledge: solutions are developed
5. Remedial action in findings: implementation of solutions designed
6. Breakthrough in cultural resistance: getting people involved and accepting the solution
7. Control at a new level: monitorization
8. Holding on to the gains: define a standard to assure the continuous gains
A very important step after the improvement is implemented is that continuous monitorization is done,
in order to ensure the results. Resistance to change will always occur, but it must be overcome; it´s the
only way to achieve high-performance levels. After the results are achieved, it is extremely important
that a system of control is installed, to prevent reversible changes.
Seven methods were developed for analyzing TQM problems by Kaory Ishikawa, the father of the
Fishbone diagram and other tools. These methods and tools are known as the seven tools of Total
Quality Management, and as more tools have been developed since, which will be described in the next
chapter, section 3.3.4.2, these tools are known as the Seven Traditional Tools:
I. Checksheet and Checklists
II. Histogram or bar graph
III. Scatter diagram
IV. Control chart
V. Cause and Effect, Fishbone or Ishikawa diagram
VI. Pareto Principle
VII. Flowchart
These seven tools can be allocated to two different categories, Statistical tools: check sheet, histogram,
scatter diagram and control chart, and Analytical tools: Pareto analysis, flowchart and cause and effect
analysis. The tools are now going to be described in more detail so that their purpose is better
understood.
I. CHECK SHEETS AND CHECKLISTS
This tool is used for recording data that allows the information to be read in a very effective way. It is a
tool that can and should be adapted to the type of information that it represents. This adaptability means
a very easy and quick interpretation of data, no matter what is displayed. Check sheets should not be
mistaken for checklists, which is a tool that creates a list of important steps or issues that have to be
considered in a specific situation. This means that checklists are a guiding tool in operations, they don’t
allow collecting data, and this is where check sheets come in.
Check sheets are considered one of the basic tools of Ishikawa´s quality tools that help with the process
of gathering relevant information in a visual and organized way.
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All in all, check sheets allow to identify in a clear way what is being observed and to simplify the
observation process. It offers a way to gather all the information that was collected in categories, which
will make its reading even more accessible. It is also a way to create a form that allows the collection
of data without any great effort. There are four types of check sheets:
o Distribution check sheet
o Location check sheet
o Cause check sheet
o Classification check sheet
II. HISTOGRAM OR BAR GRAPH
What this tool allows is to represent in a visual way the frequency of occurrence of a specific event.
There are some principles that should be always followed when the histogram is built:
1. A clear and objective title should be given
2. The class intervals should be reasonable, and too much information should be avoided
3. The axes must have proper labels
4. An independent variable should always be placed on the X axis
5. The vertical scale should begin in zero
6. If needed, the vertical scale can be doubled
7. The class intervals should be the same: this is represented by the width of the bars is the
same for every class.
III. SCATTER DIAGRAM
The scatter diagram is another statistical representation that uses cartesian coordinates to show values
for two different variables. The purpose of this tool is to display how one variable impacts the other.
Usually, the y-axis is used for the variable for which a prediction is going to be made. In other words, it
is a graph that will give a visual explanation of the relation between the two variables.
There are different types of relations, uncorrelated, correlated negatively related and positively related.
When the plot is designed, if the points almost form a line, this means that the two variables that are
being studied have a high correlation. On the other hand, if the points are scattered through the plot,
there is no existing relation.
IV. CONTROL CHART
The control chart was introduced as a tool for distinguishing chance-cause variability and assignable
cause.
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After some studies, Shewhart concluded that every process has variations, but some processes have
variations that are normal and are controlled, while other processes display variations that are not
controlled.
There are some important aspects to consider when control charts are used:
o The quality characteristics that are taken from the process at different times are
represented by a point in the chart
o For all the samples, the mean should be calculated
o The mean is represented in the graph- Centerline
o Lower and Upper control limits are also established and displayed in the graph
o The space between the control limits should be divided into zones, in accordance with
the requirement that is being used.
o When the chart is being analyzed, it is important to establish that whenever the points
are within the limits, the process is going as expected, and when the points are above
or below the limits, something occurred in the process.
V. PARETO PRINCIPLE
Also known, as 80-20 rule, it states that, 80% of the effect comes from 20% of the causes. In the case
of a TQM application, when a Pareto is developed for a machine breakdown, it can be concluded that
20% of the effects cause 80% of the machine downtime. Therefore, making an effort to solve the 20%
can result in the solving of the 80% of all problems. The aim of this tool is to easily identify which
products or processes tend to fail more often, and considering this, a prioritization can be made.
VI. CAUSE AND EFFECT DIAGRAM
The first step to solve a problem is to identify the real root cause. This step should be done in the first
place; only when the clear root cause is identified the solutions can begin to be developed. To facilitate
this process, Kaoru Ishikawa developed the Ishikawa diagram or the fishbone diagram.
This tool can be applied to any type of problem and can be adapted to fit in the best way the problem
in question. The benefits of this tool are as follows: it is a very visual and straightforward tool, it involves
the workforce in the resolution of the problem and it gives organization for the discussion of the possible
causes. (Mizuno, n.d.)
When a Cause and Effect Diagram is being developed, there are some categories that need to be taken
into consideration(Kaizen Institute, 2018b):
o The 6Ms – used mostly in manufacturing industries
▪ Machine ▪ Method ▪ Material ▪ Manpower ▪ Measurement ▪ Mother Nature (Environment)
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o The 7Ps- used mostly in the marketing industry ▪ Product ▪ Price ▪ Place ▪ Promotion ▪ People ▪ Positioning ▪ Packaging
o The 4Ps- used mostly in-service industry ▪ Policies ▪ Procedures ▪ Process technology ▪ People
In Figure 17, a fishbone tail can be seen, as an example of the application of this tool to a manufacturing industry.
VII. FLOW CHARTS
With this tool, it is possible to represent in a diagram a possible solution to a specific problem. It is a
diagram that represents the flow of a product along with several operations that take place in a process.
In other words, this tool provides a general view of the operations that a product is subject to. It is
composed of boxes that represent the specific operations, and with the use of arrows, the order is also
displayed(Kaizen Institute, 2018c).
There are three types of flowcharts:
I. Process Flow Charts
II. Operations Process charts
III. Flow Diagrams
The biggest advantage of this tool is the visual representation of the steps of a process. This should be
the first activity when improvement is being implemented. It is extremally important to understand well
the process that is being studied, and the flowchart will help in this step. Not only does it facilitate the
understanding of the process, but it provides everyone involved in this stage a clear understanding of
what is being analyzed.
Figure 17-Fishbone diagram(Kaizen Institute, 2018c).
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VSM, Value Stream Mapping is one of the tools that is used more frequently in Kaizen projects.
Identification of non-value-added activities is much easier and most importantly, it facilitates
communication and ensures that all of the involved parts are on the same page.
In conclusion, there is no doubt on how important it is to have a visual representation of the problem
that is being studied or the solutions that are being developed. The development of these tools was
very important because an international standard was provided, which allows everybody to speak the
same language.
After the initial seven tools were developed, there was still a need to create other management tools,
to simplify and improve the traditional ones. With this in mind, the Union of Japanese and Engineers
(JUSE), developed the following tools(Kiran, 2017b):
A. Affinity Diagram
B. Interrelationship diagraph
C. Tree Diagram
D. Prioritization matrix
E. Process decision program chart
F. Activity Network Diagram
G. Single Minute Exchange of Die
H. 5W2H
A. AFFINITY DIAGRAM
This tool, developed in the 1960s, also known as KJ Method, named after its founder, Jiro Kawakita, is
an auxiliary to project managers. It provides a method for brainstorming and for the organization for
data, ideas, and concepts, by grouping everything having in consideration the relationship between
them. The goal is to provide in a visual way all the information that is relevant for some project.
After brainstorming with a team a lot of concepts and ideas will appear. The step that should follow is
to display all the ideas on small cards or post-it notes and try to sort them in groups, depending on the
nature of each idea. A title to each group should be attributed, and this title will represent the relationship
between the several cards that were grouped.
B. INTERRELATIONSHIP DIAGRAPH
When analyzing problems, it can happen sometimes that several events with some relationship
between them were somehow responsible for the problem.
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It can be hard to understand all the relationships involved, so trying to put it in a visual way can be the
best solution, and this is what the Interrelationship Diagraph is for. In other words, it represents the
cause and effect relations that exist, to help to analyze the current problem.
C. TREE DIAGRAM
A tree diagram is a tool used for representing in systematic way ideas, goals or activities that are linked.
It displays the different paths or tasks that are needed to achieve sub-goals and the final goal. It is
usually used when decisions must be made. On the top of the graph, there is a primary node, that has
branches that lead to other nodes. The tree diagram tool is frequently used in TQM applications when
there is a need to follow in more detail some tasks that need to be done, in order to accomplish the
target.
This tool can have different applications: it can help in the identification of root causes of a problem that
is being analyzed, display the different relationships between different components or tasks and show
the right path to achieve the goal.
D. PRIORITIZATION MATRIX
Typically, this tool is used to show the existing relationships between several items. It is usually used
as a complementary tool of the tree diagram when project planning is ongoing. With this tool, it is
possible to prioritize the list of items and understand which ones should be tackled first because not
only the relationship between items is identified but the strength of its relationship is shown.
E. PROCESS DECISION PROGRAM CHART
This specific tool is used when there is a need to identify what could go wrong in a plan that was
developed. It displays the several tasks that are needed to achieve the desired target, and it helps to
create backup plans to limit the risks. It will show the possible events that could fail, the consequences
of this failure and some countermeasures that can be taken to mitigate the risks. In fact, this is an
extension of the tree diagram; it follows the same methodology, it only includes more levels where risks
and solutions are described.
F. ACTIVITY NETWORK DIAGRAM
The sixth tool of TQM is a tool that has the objective to analyze the different task that depends on each
other. It is frequently used in project management and also in managing quality.
As already said, it displays in a visual and simple way, the different existing relations between several
operations or tasks, that in the end will all have some impact on the project.
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Figure 19- 5W2H
G. SINGLE MINUTE EXCHANGE OF DIES (SMED)
This particular tool, known as SMED, is a process that wants to reduce the downtime of machines, due
to its changeovers (Kaizen Institute, 2018a). When the machines need setup times, this means that the
machine isn´t producing, it isn’t adding value to the customer. By reducing this downtime, the lot sizes
are also reduced and production flow is optimized. Shigeo Shingo, in his book called A revolution in
Manufacturing: The SMED system (Shingo, 1985), explains the methodology he developed to reduce
the downtime of the machines, to increase productivity. The process starts by the identification of
internal and external tasks, which consist of the tasks that can be done only when the machine is
stopped, and the tasks that can be done parallel to the machine work. In Figure 18, the steps to
implement SMED can be seen.
H. 5W2H
This specific tool was developed to be used when dealing with an improvement of a process. This tool
has the function to help in the organization of ideas and to push the improvement opportunities. The
figure below (Fig.19), shows, that each letter stands for a question that has to be answered in order to
reach the wanted conclusions.
Figure 18-SMED methodology
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3.4 Conclusion
The literature review of some main concepts was made in this section in order to provide a
contextualization of the case study and the problem that is being tackled. A more theoretical point of
view was given about costing models and total quality management (TQM) for a better understanding
of the work that is going to be developed in the following chapters.
In short, concepts related to quality and non-quality were addressed, followed by some tools and
methodologies that can be used when tackling quality problems.
With the literature review done, it was confirmed that although there are studies developed about quality
and the importance of measuring quality, it is still something that most organizations don´t pay the
attention it requires, such as Company X.
With all the information that was gathered, it is now possible to develop a structured method for tackling
quality problems, not only to identify the root causes but also to properly quantify the costs associated
to non-quality.
The concepts about quality costing introduced in the Literature Review clarified what are the important
pieces of information that need to be considered once the quantification model is being developed. The
goal is to have a clear picture of every aspect that is impacting on the costs of quality, that nowadays
are invisible to the company. Especially, the need to look at the entire production process, stage by
stage.
On the other hand, the Lean methodologies that were identified will allow developing a structured
method to be used when tackling quality problems that Company X can use, no matter what production
line is being handled. The following tools will be the base for the development of the structured method:
• Pareto
• Fishbone Diagram
• Process Flow Charts
• 5W2H
The final objective is to provide all the necessary methodologies to Company X so that whenever a
problem appears in the lines, everyone is aligned in what the path to the solution is.
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4 Preliminary Phase and Planning
In this chapter, there will be data gathering and an analysis of the current situation of the Hungarian
factory of Company X, since Kaizen Institute has started the project in February 2018. A bigger focus
will be made on the Kovomo line, as already mentioned above, which will represent a pilot in terms of
Quality Cost measuring and Quality problem-solving.
Considering the literature review made in Chapter 3, the methodologies will be applied to this specific
case study of the Kovomo line. The goal is to quantify the costs that are incurred in the production
process, focusing on the quality aspect.
This chapter will be divided into two main sectors. First, a characterization of the production line will be
made, focusing in more detail on operational aspects, and in the end, a conclusion of all the information
gathered in this chapter will be presented.
4.1 Identification and Characterization of the Quality Problem in Kovomo
This project addresses the Quality field and it is important to study the production process in order to
realize which types of quality problems may occur in this production line and understand which are the
ones that have a higher impact. For this step, data was collected from SAP, from 1st of January until the
30th of June, in order to identify all the types of quality problems that may lead to scrap.
There is one important fact that needs to be explained in order to understand the categorization made
in the following graph. When scrap for this specific line was analyzed, there was a need to categorize
scrap into two different categories, Reworked parts and Scrap parts. Reworked parts are all the parts
that at some point of the production process have been put aside due to some misalignment to the
customer´s specifications but can still be corrected with some rework from the operators. In other words,
reworks stands for all the parts that have to go back some steps in the production process and have to
repeat them. This involves extra work and time that will have a cost at the end of the day. These types
of costs are the ones that Company X isn´t tracking. On the other hand, Scrap parts are all the parts
that somewhere along the production line have been identified as not meeting customer´s requirements
and having no solution have to go to waste. This type of waste is tracked but only in quantity, without
any cost associated with it. This is the major reason why this dissertation is so relevant for Company X.
With this categorization of Rework parts and Scrap parts, data was collected, and the following graphs
were developed, Fig 20 and 21:
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Figure 21-Pareto of Reworked pieces
To facilitate the analysis of the data, two Pareto graphs were built to understand what the quality
problems were that most often occurred and whether they originated Scrap or Rework. Two of the most
frequent issues are both related to copper, lack or excess of it. The reason behind the considerable
difference between the amount of rework that results from the different amount of copper is due to the
fact that a piece with lack of material is much easier to solve than a piece with an excess. These types
of pieces usually have to go back to the production process in order to correct the problem.
After figuring out what the principal causes for the high percentage of scrap in the Kovomo are, the next
step is to study the production process in more detail, in order to understand where this lack or excess
of copper can occur and where it can be detected. For this particular step, one product was taken into
consideration, to facilitate the process of identifying the deviations. The figure below (Fig. 22) represents
the product selected, product AB.
Figure 20-Pareto of Scrap
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One of the five fundaments that Kaizen strongly defends is that if there is a problem that has to be
solved, the most important thing to do is to Go to the Gemba, where the true value for the client is
added. As a result of this fundament, in order to truly understand the production process, it was
necessary to go to the line and make some observations, so that all the steps and mechanisms are
understood.
After making the observations in the Gemba, and as already explained in Chapter 2, the Kovomo´s
production line follows the following steps:
1. Cutting
2. Bending
3. Welding
4. Manual Assembly
5. Brazing
6. Visual Check
7. Shaping
8. Leakage Test
9. Quality Control (Final Visual Check)
10. Packaging
After understanding the whole production process that product AB has to go through, it was important
to characterize the process, this time developing a characterization in the quality perspective. The goal
is to apprehend where exactly in the production process these deviations are spotted, and what
happens once the operator perceives that there is something wrong with a piece. So as to reach a
better knowledge of the entire process and deviations, an organigram was built. (Fig.23)
Figure 22-AB Product
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When the production process was observed, there were several steps that could originate scrap or
rework. The first quality wall is the Visual Check station, after Brazing. It is in the Brazing station where
the copper is put into the pieces and placed on a conveyor belt. This belt leads through an oven, where
the Brazing actually occurs. In this station, there are several operators that are injecting the copper;
every part has its own necessity in terms of location and amount of copper. The amount of copper that
is injected in each location is now up to the operator, as there is no standard for the amount that should
be put in order to reach the requirements.
When the pieces arrive at the Visual Check station, the operator has to inspect all the pieces and look
for lacking or excess of copper. The information that the operator has in this station is that there should
be at least 65% of copper in the pieces. This is another alert relating to quality. There is no physical
measure to guarantee that all the pieces have the correct amount of copper. This judgment is left to the
operator, and since the operators are always rotating, this increases the variability in the process. In
the next pictures, there is an example of some pieces that were put aside. As it can be seen in the
Figure 23-Production Process (Kovomo)
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Figure 24-Example1 Figure 25-Example2 Figure 26-Example3
Figure 27-Jig used for Product AB
figures below (24, 25 and 26), there is an excess of copper in the pieces, as the material has not stayed
in the right positions.
After the quality problem is spotted, the operator has to decide if the piece can be reworked or if it has
to go to scrap. There can be two possibilities: in case that the piece has lack of copper, the operator
has to send the piece back to the brazing, in order to fill up the locations that are lacking the material,
or, if the piece has too much copper, there is also a rework process to be done in order to recover the
piece. It is always possible that the pieces are too damaged or the deviation of the requirements is too
high, and so scrap is created.
The following quality control station is the Leakage Test. This process is performed by a machine,
handled by an operator that loads and unloads the machine. If a certain piece fails the leakage test it is
immediately sent to scrap parts. On the other hand, if the part passes the test without any alerts, it
proceeds to the final steps, Quality Control and Packaging. One of the reasons that a piece fails the
Leakage test is that the piece has lack of copper, and there is some gap between parts, and this
originates leaks that are detected in this test machine.
In the final stage, an operator has to do a final visual check, where the piece is inspected, in order to
guarantee that there aren´t any scratches on the final product. After the visual check, in this final quality
control, the part is put into a jig, as explained in chapter 2, to check if all the tubes are aligned correctly.
The jig used in this specific product can be seen in the picture below (Fig.27) Once the product has
passed all these stages, it is ready to be packed and sent to the customer.
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Once the production process was understood and the quality walls were identified, it was necessary to
understand what the scientific consequences are that result from the lack or excess of copper. Firstly,
it was important to understand what is the phenomenon behind the consequences.
Alongside the engineering team of Company X, analyses and observations were made, in order to
understand the consequences of this lack or excess of copper. This deviation affected the Brazing of
the pieces, due to the Capillary Effect. There is a need to understand what this capillary effect stands
for, in order to examine the production process in more detail, to figure out where this quality problem
originated from.
The Capillary effect stands for the ability of a liquid, when confined in narrow spaces to flow, without
any help from external sources, such as for example gravity. The reason behind this phenomenon is
the intermolecular forces that exist between the solid surfaces that surround the liquid.
Some specific conditions are necessary for that effect to occur. The tube has to have a diameter small
enough in order to combine the surface tension that is caused by the cohesion effect within the liquid
with the adhesive forces between the tube and the liquid. These conditions are the ones that will make
the liquid propel. (Marios Sophocleous, 2010)
Once the Kovomo´s production process was fully understood, the quality gates identified and the
consequences pointed out, it was necessary to investigate in more detail every production step, in order
to comprehend where in fact the problem could originate from and what the true root cause is for this
quality problem. Having this in mind, the Gemba was once again the right place. Every step of the
process was analyzed, and these were the observations made in each one:
• Manual Assembly
o In this step, there is a copper ring that has to be assembled, with the help of a tool, in
a metal piece. The problem in this stage is that sometimes the copper ring isn´t
assembled in the right way, and when the piece is handled, the copper ring falls out.
There is also another scenario that might happen if the operator isn´t focusing on the
task: two copper rings might be assembled instead of one. Both cases will interfere with
the Brazing process and affect the Capillary effect.
o Before the Assembly of the tubes, they must be calibrated. This process is also carried
out with the help of a tool. The tube has two ends, and it needs to be calibrated in
separate machines, with different specifications. In case the tubes aren´t calibrated
correctly, there could be a gap between the tube and the piece that has to be
assembled. The gap can have a deviation between 0.05 mm and 0.2 mm. If the
deviation is bigger than the above values, the necessary conditions will not be reached.
The issues encountered in this stage were:
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▪ There is a high variation within this process, as it depends on the focus of the
operator in calibrating the tube the right way.
▪ The calibration tool presents signs of wear.
▪ Missing specifications of calibrated diagrams – there is no way for the operator
to certify if the tube is calibrated correctly
▪ The existence of a wrong setting of calibration.
• Welding
o The operator before doing the actual welding should do a visual check, in order to
guarantee that everything is according to the specifications. After observing the line
and the standard work of several operators, it was concluded that this step isn´t
followed. Without this procedure, improper bending, for example, is not detected, since
the welding equipment has no mechanisms to prevent the piece from moving along the
production process without being 100% accurate.
o The welding machine is worn out due to the low maintenance of the equipment.
• Brazing
o It is in this station that the copper paste is placed in the parts. The principal issues in
this are stage are:
▪ Wrong copper paste position – operators don´t have a clear and visual
standard work to follow, in order to know for each product how much and where
the paste is needed.
▪ To ensure that the Brazing is done correctly, the parts need to be in a specific
layout on the belt, but once again, there is no standard for the operators to
follow.
• Visual Check + Shaping
o This is the first quality wall, where the operator has the responsibility of analyzing the
piece and determining if it can move along the production process, or if it needs to be
reworked, and in the worst case scenario, it is considered scrap. Once again, there are
no standards for the operator to follow, so the operator has to rely only on the visual
aspect and common sense.
• Final Visual Check + Packaging
o In this final stage, the problem remains as in the previous step explained above. There
are no standards or guides for the operator. What may happen because of this lack of
standards is that a piece may pass through the Visual Check+ Shaping stage, and it
can come to this final stage, and the operator may think that this part isn´t within the
requirements. These types of errors can´t occur, as this signifies high variability in the
process.
46
Figure 28-5W2H for Excess Copper
Figure 29-5W2H for Lack of Copper
The 5W2H tool was used to describe the quality problem that is being tackled, that is the Excess and
Lack of Copper in the pieces. This is another tool used in Total Quality Management, as explained in
the Literature Review. This tool consists in answering the following questions:
• WHERE? – Where is the problem most frequently detected?
• WHEN? – When does the problem occur? At what stage of the production process?
• WHO? – Who can detect the problem? Who can originate it?
• WHAT? – What is the trend of the problem?
• WHICH? -
• HOW and HOW MUCH? – How does the problem affect the flow? How is detected?
Considering the causes that are being tackled, here are the answers to the previous questions:
Root Cause: Excess of Copper
Root Cause: Lack of Copper
47
Figure 30-Ishikawa Diagram
The Cause and Effect Diagram, also known as Ishikawa or Fishbone Diagram (Figure 28), as explained
in Chapter 2, is a very useful tool when tackling a complicated problem. The following diagram can be
seen in more detail in the Attachments, at the end of this dissertation.
The reason behind the Fishbone diagram is because there is a need to identify all the possible causes
to the problem and categorize them so that the path to the solution is much clearer. In order to construct
this diagram, for the specific problem that is being tackled in the Kovomo line, all the data that was
collected so far was grouped, analyzed and divided into the categories. In order to have a better
understanding and easiness of reading, the causes compiled in the Ishikawa Diagram presented above
are listed below:
Fishbone Diagram - Root Cause: Missing or Excess Copper
• Mother Nature/ Environment
o Airflow within the tubes, when the pieces are in the conveyer belt, passing through the
oven.
o Maintenance and cleaning of the operator´s gloves and the workstation
• Manpower
o Lack of training of the operators
o The ability to paste the copper in the right places in a certain amount
o The operator doesn´t follow the standards (in most cases they don´t even exist)
• Method
o The correct procedure isn´t being followed by the operators
48
o Lack of accuracy in the pasting process
o Ability to position the pieces in the right layout in the conveyer belt
o The lack of a visual check before and after the brazing process
o Lack of standards for visual checking
o Lack of maintenance of the calibration and welding machine
o Missing dedicated operators for crucial operations
o Missing specification for calibration of the diameter
o Improper validation of documentation
o Checklist between processes doesn´t exist
o Already assembled ring can fall out if not assembled correctly
o Missing paste preparation
• Measurement
o Unknown control limits in the crucial steps of the process
▪ Brazing
▪ Welding
▪ Visual Check
▪ Shaping
o Lack of measurement of the gap between assembled parts
• Material
o The existence of surface tension
o Poor quality of the pasting material (copper)
o The existence of a gap between welded parts
o Storage place of pasted parts and welded parts isn´t ideal to conserve their conditions.
If a piece isn´t stored right, it can origin deviations
o Different heat absorption, due to the layout of the pieces on the conveyor not being the
ideal one
• Machine
o There may be some deviations in the setting of the Oven, such as speed and
temperature. If the conditions aren´t the right ones, the Brazing process won´t go as it
ought to
o The feeding of the copper paste to the products is done by a type of gun with a needle.
Even if the locations and requirements of copper change from product to product, the
gun, and needle used is always the same
o The improper capability of bending machine and tools
49
4.2 Chapter Conclusion
In the present chapter, the Planning Phase, for a specific production line of Company X, a
characterization of the current state was made and causes for the quality problems were identified.
For the characterization of the line, it was important first to understand the current state of the line, such
as its productivity and the level of scrap. A study was conducted to comprehend what the principal
causes are of the high level of scrap parts and rework that has to be done. The target state was identified
and the objective was clear, as a result, the savings and benefits were evident. Following this analysis,
a study of the production process was conducted and for this several tools of Total Quality Management
were used.
With the analysis made in this chapter, the quality problem is fully comprehended, and the gaps are
once again evident. There is no structured method to use in order to tackle this type of situations, and
there is no visibility of the costs that these defects are causing.
At this time, the following information has been gathered:
• Characterization of the Kovomo line
• Characterization of the production process
• Identification of all the critical steps in the production process
• Understanding the root causes that are causing the high level of crap (Lack and Excess of
copper)
• Information about the phenomenon that is caused by the quality problem (Capillary Effect)
• Categorization of the possible causes that lead to the principal root causes
Considering all the work that has been done so far, all the conditions are met to execute the
implementation phase that will consist of two stages:
I. Design of a structured methodology that should be used in order to tackle these types of
problems. A method should be defined, so that whenever these types of problems occur, there
is a path that should be followed, in order to reach the solutions in the best possible way.
II. Development of a quantification model that will quantify the costs that are incurred during the
production process, with respect to quality (Rework and Scrap)
The disruptive aspect of this dissertation is the development of methodologies that will help Company
X, not only in this specific situation that is being analyzed but also for future problems that may occur.
With this quantification model and problem-solving methodology, no matter what the quality problem,
the Company’s team, will have no difficulty to find the solutions and bring benefits and savings to the
firm.
50
This is directly related to the limitations that were identified in Chapter 2, the lack of knowledge regarding
the costs associated to quality and the entire production process, and the need for a structured method
to address these types of situations, in order to guarantee that the problems are solved as efficiently as
possible and future problems are prevented.
51
Figure 31-Methodology Suggested
5 Procedure Manual
The goal of this dissertation is to provide tools that will enable Company X, to tackle future problems.
What can be seen in Figure 31 is the Methodology that is suggested in this dissertation. Once Company
X faces a certain quality problem, the quantification model should be used for the calculation of the
costs and the Procedure Manual to reach a solution to the problem at hand.
The aim of the manual proposed in this dissertation is to provide Company X with a method to address
whatever quality problems appear. Most frequently problems are ignored or they have been pushed
aside because there isn´t enough time to deal with them. The biggest consequence of this is that when
problems aren´t being tackled, there is no room for improvement. This structured procedure comes as
an answer to this gap.
The manual consists of 9 Steps that have to be taken so that the solution is reached in the fastest
possible way but guaranteeing a good result. All steps will be identified and explained in detail.
Every project that will be made should follow the following steps:
1. Clarify the Purpose
2. Characterize the Initial State
3. Set the Target State
4. Find the Root Causes
5. Design Solutions
6. Test Solutions
7. Update Action Plan
8. Confirm Results and Standardize
9. Lessons Learned
52
1. Characterization of the Purpose of the Project
In every project, it is important to have a clear understanding of the final goal. The purpose of the project
has to be defined, in order to understand what is the path to it.
In order to have a good characterization of the objective of the project, the following steps have to be
followed:
I. Identification of the Problem to be solved
II. Definition of the boundaries of the project
III. Objectives to be Reached
2. Characterization of the Initial State
Once the scope of the project is defined and clear for the whole team, it is important to understand what
is the current situation of the production line. The problem can only be defined if a good characterization
of the initial state is made.
For this step, an analysis has to be made to establish the initial state. To complete the analysis the
following tools have to be used:
• 5W2H- guarantee that the problem is correctly defined
• Pareto graph- analyze the data collected.
• Observation - there is nothing better than going to the Gemba, the place where the value is
added, and observe what is happening. Some time should be spent observing what is
occurring in the production line and identifying opportunities. Inputs from the operators are also
important, as they are the ones that are in the line every day adding value.
For this step, the quantification model, that will be explained in the following section, should be used, in
order to give a more accurate vision of the costs incurred in the production line, which will characterize
the initial state, and in the end the evolution of costs can be seen.
3. Set Target State
Once the purpose of the project is identified and the current state is characterized, the problem is
evident. The problem consists of the existing gap between the initial state and the target state,
considering the purpose defined. The target is the goal that is reached at the end of the project, it should
be well defined and it should be SMART:
53
• Specific - the area for improvement should be a specific one, and the goal should be clear
• Measurable- concrete criteria should be established to measure the progress of the project
• Attainable- the goal that is being pursued has to be acceptable for all the team involved
• Relevant- the project has to bring benefits to the organization and have impact
• Time-Bounded- a time frame should be established, so that there is a sense of commitment
These characteristics are important when the target state is defined. A poorly defined target can lead
to the team’s lack of motivation and the failure of the project. There are some aspects that should be
also included, metrics that will measure the accomplishment of the project, the time limit of the project
and what is the value of the target defined. With all these characteristics met, the path to the objective
is clear and well defined. This target, which is defined at this stage, will be used as the major KPI of this
project that will allow top management to track the evolution of the project and calculate the benefits
and gains.
4. Find Root Causes
By this stage, there is an awareness of the quality problem, but there isn´t an explanation or root cause.
In order to find the root causes of the quality problem, there are several steps that need to be taken:
I. Understand the production process – characterization of every step that the product has to
go through until is packed to be delivered to the client
• VSM tool will help to map the entire production process in a visual and organized
way.
II. Study the production process, in order to identify where the quality problem is spotted
III. Develop a Root Cause Analysis, to identify the possible causes for the quality problem
• Ishikawa Diagram, which will allow us to categorize all the causes identified, and
reach the real root cause
• 5 Why Analysis, which will guide us through the process of going in depth into the
quality true root cause
IV. Return to the production process, to determine where the quality problem originates
For the identification of the root causes, Kaizen has developed tools that will guide us through this
process:
• Ishikawa Diagram
As already explained in Chapter 3, the Ishikawa Diagram is a useful tool for the identification of causes
and also facilitates the process of brainstorming. This tool consists of a backbone of a fish, with its fish
bones representing the most likely causes. If the causes are not easily identified, the best method is to
begin by going through the 6Ms:
54
o Manpower – people that are involved in the production process (e.g.: Operators)
o Methods - how is the process done, and all the requirements that are involved, such
as rules, procedures, and regulations
o Machines – equipment that is required for the process (e.g.: Brazing Oven)
o Materials – raw materials and parts needed (e.g.: copper paste)
o Measurements – data that is generated that will allow evaluating the quality
o Mother nature – conditions that the production process is put through
• 5 Whys Analysis
After a brainstorming is done to gather all the possible causes that can originate the quality problem,
this tool can be used, in order to understand the effect of each cause on the problem. The idea is to
answer each question with a single statement, then choose a why question with a direct relation to the
previous answer given. This questioning process should be done until the root cause is done, and in
the end, there should be a verification of the truthiness of each why. The number of questions will
depend on the complexity of the problem.
“Recognizing the problem is more important than finding a solution
because the exact description of the problem leads almost automatically to
the correct solution.”
Albert Einstein
5. Define Next Steps
The next steps to take to improve the process and guarantee a scrap reduction will be defined. A list all
the possible solutions that will lead to the concretization of the vision should be prepared, because the
solution may not be a single action, but a group of actions that will have to be implemented. A Priority
Matrix should be built to assess the implementation impact and effort for each action. The actions can
be grouped into four categories:
o Low Effort / High Impact – Quick-Wins
o High Impact / High Effort - Major Projects
o Low Impact / High Effort - Thankless Tasks
o Low Effort / Low Impact - Actions Cancelled
55
Figure 32-Priority Matrix
6. Implementation of Solutions
Once all the actions and solutions are listed and prioritized, the next step in this process is to validate
that each and every possible solution will be successful and produce the desired benefits. For this step,
there is a need to go to the Gemba and test the possible solutions. For each solution that will be tested
there are several important aspects that must be defined:
o A responsible for the testing process
o List of all processes/ task standards that will be changed
o The timeframe for the solution testing
o Resources that will be necessary for the tests
o Success criteria to, later on, evaluate the test as successful or not
o A test plan that should be validated with all areas that will be involved in the testing
It´s important to have the testing phase well planned, to guarantee that the testing of the possible
solutions is well executed and delivers concrete results, which will define what is the path that should
be followed in the future. Establishing dates and responsible ensures that there is a due date for testing
and implementation of the solutions and that someone is guiding the team throughout the process.
7. Implementation Plan
Once the solutions are tested, the purpose of the project is almost accomplished. The following step is
the implementation of the actions defined. Once more, there is a need to organize the team to make
sure that everything goes according to plan. For this step:
• All the actions to be executed should be listed
• An owner and a due date should be assigned.
56
By attributing ownership of an action to a member of a team, not only is the team encouraged to
participate in the solution, but there is also someone who will be responsible to ensure that a certain
task is carried out. Despite the fact that there is an owner to each action, it is important to monitor the
development of the action plan on a regular basis.
8. Results Confirmation and Standardization
By the end of the implementation of all the actions that were defined as necessary to reach the target
state, defined in Step 3, the results should be confirmed. This confirmation is made by comparing the
initial state and final state: the gap that existed between the initial situation and the target state should
have been eliminated with the implementation of the actions defined by the team. It is important to
quantify the gains made with this gap elimination.
In case the target goal wasn´t reached, it is necessary to go back to Step 2 of this process and
reevaluate the situation, in order to understand why the objective wasn´t reached. Sometimes the cause
that was identified as the root cause in Step 4 wasn´t, in fact, the real root cause, and in these cases,
a new analysis should be performed.
To ensure that the indicator, in this case, the scrap level, stays in the percentage that was defined, the
processes must be standardized, to guarantee that the new procedures are followed by everyone.
Standards have to be developed and the teams and operators have to be trained according to the new
methods. For this step, a responsible should also be appointed that will lead the team in performing and
sustaining the newly developed methods. It is advisable, in order to support this process, to develop a
skill matrix that will help the person responsible to train the team and develop their competences.
9. Rollout and Lessons Learned
The final step is an evaluation of the project that has been developed, in order to determine what the
aspects that went well were and the major difficulties felt. This stage is important because in every
project there is something new that the teams learn and that can be used in later projects, and analyzing
the difficulties and obstacles felt may help avoid mistakes in the future.
During this process, as it was explained, it can happen that once step 6, Implementation of Solutions,
is reached, some solutions won´t yield the results that were expected. In case this happens, an analysis
should be made to understand the reason behind this failure. This process is important so that these
errors aren´t repeated.
The purpose of this Step by Step Process is to provide a tool to Company X to tackle future issues in
the factories. This dissertation applied this process to a specific production line, Kovomo, for a specific
purpose, reduction of Scrap level due to Lack and Excess of Copper.
57
Figure 33-Step by Step Procedure - Kovomo
5.1 Step by Step Implementation Process – Kovomo
The procedure explained previously was applied to the production line that was studied in this
dissertation. In this section, the manual will be used for the scrap problem that was present in the
Kovomo. All the steps will be explained in more detail, but in the figure below (Fig.33), a summary can
be seen of the use of this procedure manual. For a more detailed view, Figure 33 is present in the
Attachments.
1. Characterization of the Purpose of the Project
In case of Company X, once the whole factory is dealing with a high-level of scrap, an analysis has to
be made, as it was shown in Chapter 3, to determine what the priority lines are in terms of scrap level.
A cost analysis was made with the help of the tool developed previously to determine the lines that incur
more quality costs. Considering the scope of the project, which in this case is the reduction of the Scrap
level in the Hungarian factory of Company X, and with this two analyses done, a path to reducing non-
quality is clear.
2. Characterization of the Initial State
For the characterization of the initial states, all the data that was gathered in Chapter 4 regarding Pareto
for the quality issues and the quantification of the associated costs should be presented in this step, as
it can be seen in Figure 33, in the second step.
58
Figure 34-Ishikawa done with Company X
3. Set Target State
The purpose of this specific project was to reduce the scrap level of the production line: considering a
5% of scrap level, in the beginning, the target was set to 3.5%, which would lead to a saving of 11,000€.
For the calculation of the benefits, the data that is generated by the tool developed in this dissertation
is used to understand, once the scrap level is reduced, how much the savings are due to the reduction
of the cost of non-quality.
4. Find Root Causes
For the identification of all the root causes involved, tools such as 5 Whys and the Ishikawa Diagram
were used:
• 5 Whys:
o Why was the product rejected in the Leakage test? – It presented signs of leaking
o Why did the product have leakage products? – There were holes between the
assembled parts
o Why were there holes in the part? – There wasn´t enough copper in the product
o Why was there not enough copper in the part? – The operator forgot to put the copper
paste
• Ishikawa Diagram was developed in a workshop with operators from the production line,
engineering and quality team, and top management. An analysis of all root causes,
identified:
5. Define Solutions
There were two problems that were identified as critical, once the Ishikawa Diagram was analyzed:
• Incorrect copper pasting in the pieces, due to lack of standardization in this process
• Improper calibration in the tubes, since there is no system that would alert the operator to
this problem.
59
Figure 36-Standard Work for Pasting
Figure 35- Poka-Yoke System
Table 1- Test Plan
For these two problems, two solutions were developed:
• Standard Work for the operators in the copper pasting station, as it can be seen in the figure
below (Fig.35). A draft was made to represent the idea: it should be clear for the operator
where the paste should go and in what amount.
• Poka Yoke mechanism, as seen in Figure 36, should be implemented in the calibration
station, so that the operator can test each piece and guarantee that only pieces 100%
calibrated continue along the production process.
6. Testing Solutions
In order to test the solutions presented in the previous step, a Test plan had to be defined, as can be
seen in the following table:
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Table 2-Implementation Plan
Figure 37-Results of the Testing Phase
7. Implementation Plan
Once the solutions are tested and proved successful, the implementation plan is triggered:
8. Results Confirmation and Standardization
During the week of testing made for each solution, the data was gathered and the following analysis
was made (Fig.37):
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Before any solution was tested, the Kovomo line had a percentage of 5% of Scrap, which represented
an average of 10 pieces per day of defective parts, parts that went to Scrap. With the implementation
of the Standard Work in the pasting station and the poka-yoke system, as it can be seen in the graph
above, a 33% reduction was achieved.
9. Rollout and Lessons Learned
After testing the solutions developed, the target of 3% of Scrap for the entire Kovomo line wasn´t
reached; therefore, it was necessary to go back to the root cause analysis and understand what other
causes could be affecting the quality of the production line. The idea is to go back to Step 4 and analyze
the data gathered to reach the real root cause. When this is solved, it will bring the desired results.
This work was left to Company X’s team to develop internally, with the help of the procedure manual
and the quantification model developed.
5.2 Development of the Non-Quality Costing Tool
The factory located in Hungary is dealing with quality problems manifesting as a high level of Scrap.
Every production line is producing with a high percentage of scrap, which led to the implementation of
Rework stations, for example, Shaping. These stations are pure non-value adding activities that had to
be created due to the high percentage of scrap production.
In the current situation of the factory, the productivity is so low that the volume produced isn´t enough
to cover the orders, which makes the scrap levels an even more relevant subject.
When the data was started to be gathered and analyzed, in order to start the projects, more specifically
the Quality workshops, a clear gap was identified. When the scrap costs are calculated, the only factor
that is being taken into consideration is the value of the raw material that is lost. This means that when
this analysis was done, the only factor used was the cost of the parts that are rejected and considered
as scrap in each production line, meaning that they didn´t return to the production process. All the
pieces that at some point of the production cycle were identified as defective and went back some steps
along the production process, so that the problem could be corrected, weren´t included into the non-
quality costs.
Considering that a high percentage of the volume produced had to be reworked, this was an alarming
factor, which Company X wasn’t even paying attention to. Combining the negative EBITA and the high
percentage of scrap, it was imperative to develop a tool that calculates the true cost of Non-Quality, in
order to bring awareness to this factor and show the importance of the improvements that need to be
made in the production lines.
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A quality costing model is a very important asset when projects associated with quality are being
developed. It allows us to track the gains that are being reached with the improvements that are being
made, and also shows the relevance of these types of projects. This is the reason why Total Quality
Management has to go hand in hand with Quality Costing.
The drive for this dissertation work was to develop a model that will quantify all the costs that are
incurred in terms of non-quality, and that have until now been invisible to the company.
There are two types of quality costs:
• Price of Conformance (PoC)- includes all the costs that are incurred to prevent poor Quality in
the products, as for example, inspections and visual controls
• Price of Non-Conformance (PoNC) - represents the costs that are incurred when a product
presents some defect
This is some of the costs that he pointed as relevant:
• Tangible Factory – Scrap, Rework and Inspections
• Tangible Sales Costs – the costs associated with handling customers
• Intangible Costs – costs of losing customer´s goodwill, penalties for delays in deliveries
The aim of this model is to change the current mentality with regard to quality costing. This awareness
will bring a vision of the real situation of the costs associated with quality. With this knowledge, Company
X will know what the more critical production lines are in terms of costs, and what the specific production
process to be improved is. The goal is to break the current paradigm of only considering the costs of
the lost material due to defects and include all the other costs that are currently hidden.
The costs of quality have to be calculated according to equation 1:
∑ 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐶𝑜𝑠𝑡𝑠 = ∑ 𝐶𝑜𝑛𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 𝐶𝑜𝑠𝑡𝑠 + ∑ 𝑁𝑜𝑛 − 𝐶𝑜𝑛𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 𝐶𝑜𝑠𝑡𝑠 (1)
In order to develop the accurate quality costing model there are some data that need to be gathered:
• Cost per hour per FTE (operator)
• Cost per hour per machine time usage (which includes the energy costs)
• Total Costs of raw material used in the production process
• Cycle times for all the production steps
• Percentage of rework (an average based on the last months)
• The volume produced by the production line
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All parts have to pass through a Rework station in order to check if the part is according to specifications;
if not, a shaping process takes place to correct the piece.
In Company X, and in most of the automotive industry, this Rework station is seen as necessary, and
as a result, the costs of this step aren´t taken into consideration, because they are seen as just another
step in the production process.
With this new vision, the cost of each piece will be calculated in a different way than the one that has
been done so far. With the help of the quality costing model, it will be able to estimate the cost of non-
quality of each piece. The logic behind this is that a piece has two options regarding the production
process. The piece can run through the entire production process without any error, and this will
represent the ideal cost of a piece. On the other hand, as explained in Chapter 2, a piece can be rejected
at some point of the production process and has to be sent back to be reworked. In this case, to the
ideal cost of the piece, the cost of non-quality should be added. This cost of non-quality will contemplate
all the costs that are incurred in the rework process, such as:
o The cost of having operators that are allocated to these rework stations; instead of
producing new products, their time is spent correcting errors that occur along the process.
o The cost of having the machines running for these reworked parts, in case the piece needs
to go back to a certain machine, considering the energy that is used.
o The cost of raw material that needs to be replaced, if that is the case.
The ideal cost of a piece can be calculated with equation 2:
𝐼𝑑𝑒𝑎𝑙 𝐶𝑜𝑠𝑡 = ∑ (𝐹𝑇𝐸 𝐶𝑜𝑠𝑡 𝑗 + 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐶𝑜𝑠𝑡 𝑗 + 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑠𝑡 𝑗)𝑚𝑗=1 (2)
The letter j represents all the different production processes that can exist in a production line.
In order to calculate the final cost of a piece produced, contemplating the non-quality, the model will
take into consideration all the costs explained above. All the values presented in this chapter are not
real, due to confidential reasons.
Another disruptive aspect that this quality costing model brings, is that with the help of this model, it is
possible to quantify the costs of each production process. When using this model, there will not only be
a vision of the total quality costs, including the ideal cost and the non-quality cost, but also a clear vision
of all the costs that are incurred in each step. Nowadays there is no knowledge of this aspect because
quality costs aren´t being seen in this detail. This could be useful if a more detailed analysis of the
process was made, in order to understand which are the processes are that cost more. This costing
method will support the need to reduce and eliminate all rework stations since they only bring extra
costs to the company. It is important to refer, that for the usage of this quantification model, cooperation
between the financial department and management control, for accuracy of all data.
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CUTTING BENDING WELDING
MANUAL
ASSEMBLY
1
MANUAL
ASSEMBLY
2
CALIBRATION BRAZINGVISUAL
CHECKREWORK 1 SHAPPING
LEAKAGE
TEST
QUALITY
CONTROLPACKAGING TOTAL COST
FTE Time(s) 25.00 8.00 12.00 10.00 10.00 15.00 15.00 30.00 35.00 30.00 15.00
NºFTE 1 1 1 1 2 1 1 1 1 1 1FTE Cost 0.04 € 0.01 € 0.02 € 0.02 € 0.03 € 0.02 € 0.02 € 0.05 € 0.06 € 0.05 € 0.02 € 0.34 €
Machine Time(s) 10.00 18.00 13.00 2400.00 13.00
Machine Time Cost 0.06 € 0.08 € 0.07 € 1.33 € 0.09 € 1.63 €
Raw Material Cost 1.00 € 0.02 € 0.50 € 0.60 € 0.40 € 2.52 €
PRODUCTION CLYLEPRODUCTION STEPS
Table 3- Machine Costs and Raw Material Costs
Table 4-Production Cycle Characterization
Cost/ hour Cost/second
20.00 € 0.01 €
15.00 € 0.00 €
20.00 € 0.01 €
100.00 € 0.03 €
25.00 € 0.01 € 0.20 €
0.50 €
0.60 € Brazing
Leakage Test
RAW MATERIAL COSTS PER PIECE
Material
Tube
Copper Rings
Joints
Copper Paste
Safety Caps
Cost
1.00 €
0.02 €
Machines
MACHINE COSTS PER PIECE
Cutting
Bending
Welding
What´s the process behind the Quality Costing tool? The first step for this quality costing is to
characterize the production process, by identifying all the steps that one piece has to go through until it
is ready to be delivered to the client.
When all the steps are characterized, the data for each step is gathered, regarding, FTE time, Machine
time, Raw material needed, and all the costs associated with these parameters. The tables below (Table
3), show the data gathered for the Kovomo Line:
The cost of labor that is calculated in the table below (Table 4), considers the cost per hour per operator
(𝑐𝑜𝑠𝑡 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒), the cycle time of each piece to be produced in a production step (𝑡𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒−𝑛) and the
number of operators involved in the process (𝑛). With this in mind, the cost of FTE is calculated, per
production process, with the following equation:
𝐹𝑇𝐸 𝐶𝑜𝑠𝑡 = ∑ (𝑛=1 𝑡𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒−𝑛 ∗ 𝑐𝑜𝑠𝑡 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒) (3)
The machine cost is calculated with the same method as the FTE cost. It considers the machine cost
per piece (𝑖) being produced ( 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑐𝑜𝑠𝑡 𝑖) and the machine time per piece (𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑡𝑖𝑚𝑒 𝑖).
Therefore, the machine cost, allocated to the production of one product, can be calculated with the
following equation:
𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐶𝑜𝑠𝑡 𝑖 = 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑡𝑖𝑚𝑒 𝑖 ∗ 𝑐𝑜𝑠𝑡 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑖 (4)
After having all the necessary data, the following table can be completed with the information necessary,
as can be seen in Table 4.
65
Input Variables
DEMAND 1000 (per shift)
OPERATOR COST 5.70 € (per hour)
SHIFT 7.33 (hours)
VOLUME PRODUCED 700 (per hour)
SCRAP % 30% (pieces)
Table 5-Input Variables
Table 6-Quality paths
Legend
Rework
Scrap
CUTTING BENDING WELDING
MANUAL
ASSEMBLY
1
MANUAL
ASSEMBLY
2
CALIBRATIONREWORK
1REWORK 2 BRAZING
VISUAL
CHECKREWORK SHAPPING
LEAKAGE
TEST
QUALITY
CONTROLPACKAGING
Cost per Process 1.06 € 0.08 € 0.11 € 0.03 € 0.52 € 0.02 € 0.25 € 0.20 € 1.97 € 0.02 € 0.36 € 0.05 € 0.15 € 0.05 € 0.42 €
TOTAL
COST
NON
QUALITY
COST
%
OCURRED
Too much Copper X X X X X X X X
Rework X X X X X X X X X
Lack of Coper X X X X X X X X
X X X X X X X
Scrap X X X X X X X X 3.80 € 3.80 € 12%
Leakage Problems X X X X X X X X X X
X X X X X X
Scrap Final X X X X X X X X X X X 4.46 € 4.46 € 2%
7.26 € 23%
6.65 €
6.65 €
52%
11%
2.80 €
2.19 €
2.19 €
QUALITY PATHS
Alongside this information, the volume produced should also be collected, as well as the percentage of
scrap produced and the cost per FTE. This data represents the input variables that are needed for the
quantification of the quality costs.
As it was explained in Chapter 2, with the help of the Organigram (Fig. 23), a piece can have different
paths in the production process, depending on the existence of quality problems. By studying the
production process, and understanding where the locations are, where a defect can occur, the following
table, can be built (Table 6).
From the table 6, it is clear that each type of defect can originate different paths that will represent
different costs. This step is fundamental for the quality costing and it is important that the study
developed in Chapter 4 is well performed, because it will be the base for this tool. There are two points
that are relevant in this process and need to be identified by the user of the tool. The Detection point,
where in the process the operator detects that there is a defect in a certain product, and the first Rework
process, in other words, how far in the production process does the piece need to go in order to be
corrected, according to the customer´s requirements.
The following step is to understand from the volume produced in a certain month what the percentages
are of each quality path that occurred. For the month of May, these were the results for the Kovomo
line:
66
%
OCURRED
23%
52%
12%
11%
2%
Leakage Problems
Scrap Final
QUALITY PATHS
Too much Copper
Lack of Copper
Scrap
Table 7-Quality Paths Kovomo May
Having the percentage of the volume that goes through each quality path, and with all the data gathered
previously, it is possible to determine the costs associated to quality, in a certain month, taking into
consideration all the quality problems that occurred, and including all the parameters that are relevant
to consider in this type of analysis.
The final non- quality cost will be calculated by the Quality Costing Model, but it can be expressed in
the following mathematical equation:
𝑁𝑜𝑛 − 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐶𝑜𝑠𝑡𝑠 = ∑ 𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡𝑛𝑖=1 ∗ %𝑂𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑒 𝑖 ∗ ∑ 𝑋𝑎,𝑦
𝑐𝑦=𝑏 (4)
The letter i stands for all the quality paths that are possible, depending on the defects that may occur.
Variable b is the 1st Rework process that a certain product has to go back to if an error appears. Finally,
variable c is the Detection point, where the defect is in fact detected, and X is the cost associated with
that Rework path taken.
All in all, the final cost of a piece that is produced in the Kovomo line will take in to account the following
parameters:
• The cost of a piece that is produced with no defects, that is:
• The cost for the FTE time
• The cost of the usage of a machine to produce a specific piece
• The cost of the raw material that is needed
• The Non-Quality Cost, which includes:
• All the possible quality paths that a piece can take, depending on the defect that is
originated, and the cost associated with it, considering all the rework and corrections
that need to be made
With this new perspective, the cost of a product is calculated with the following mathematical formula:
𝐹𝑖𝑛𝑎𝑙 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐶𝑜𝑠𝑡 = 𝑁𝑜𝑛 − 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐶𝑜𝑠𝑡 ∗ 𝑂𝑢𝑡𝑝𝑢𝑡 ∗ %𝑆𝑐𝑟𝑎𝑝 + 𝐼𝑑𝑒𝑎𝑙 𝑐𝑜𝑠𝑡 (5)
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Figure 38-Cost per Production Process
What this quantification model gives as an output is the clear picture of the quality costs involved in a
production line, by specifying the costs incurred in each step of the process and with all the rework
included, as can be seen in Figure 38:
5.3 Conclusions
The vision developed in this dissertation, and in this Chapter 5, is a totally disruptive vision for this
industry. Until today Company X, has calculated quality costs assuming only the losses of material due
to scrap, all the rework and corrections made weren´t even taken into consideration. The principle drive
for this dissertation work was to alert Company X to all the costs that are being incurred and aren´t even
visible to the top management.
This quality costing tool isn´t only meant to evidence the costs and the losses that occur, but also to
evidence the opportunities for improvement that exist and the need for continuous improvement.
As already mentioned, the model developed in this dissertation allows Company X not only to evaluate
the costs that are being incurred in a specific production line, but also to go in depth, and understand
within the process which are the steps that are causing more costs. This was a vision that wasn´t
available to the top management because this type of analysis was never performed. With this analysis,
it becomes clear which the processes are that need to be improved in terms of costs.
In this chapter, it was also explained step by step how Company X should act in case future quality
problems occur. With the gap identified in Chapter 2, without a structured way to tackle these types of
issues, the necessity arose to develop a methodology that could be used in these cases. A step by step
procedure was developed for future use. This way, no matter what type of problem occurs, every
member of the company has the right tools and structure to be able to solve a problem.
This chapter represents the important contribution of this dissertation work to Company X: a
quantification model that represents the reality of each process, bringing awareness to all the costs that
are incurred in a production process and a structured methodology for problem-solving.
68
69
- € 74 243 € 119 655 € 172 332 € 223 626 € 264 525 € - € 21 550 € 77 100 €
146 625 € 222 975 €
322 600 €
442 925 €
581 050 €
726 000 €
873 250 €
1 046 950 €
1 220 650 €
- €
200 000 €
400 000 €
600 000 €
800 000 €
1 000 000 €
1 200 000 €
1 400 000 €
€
Months
Real Monthly Saving Ac Target Saving
Figure 39-Overall Savings
6 Presentation and Analysis of the Results Obtained
This chapter is divided into two different parts. The first one, section 6.1, presents the indicators that
were used and the description of the results obtained is demonstrated, where a comparison of the initial
and final situation is made in order to track the benefits and savings that were made throughout the
development of the project, explained in Chapter 5.
The second part, section 6.2, a conclusion of the results is made, having in consideration the
quantification model developed.
6.1 Description and Presentation of the results
6.1.1 Overall Savings
Overall Savings is the principle indicator of the Kaizen project in the Hungarian factory of Company X.
This indicator combines all the savings in every department that is dealt with: Quality, Productivity, and
Logistics. This indicator represents a sum of all the savings that are made each month. The other
indicators, which will be explained next, combined, are what originates this major indicator.
6.1.2 Scrap Cost per Part Produced
The evaluation of the Scrap costs is the principal indicator of the Quality work package. As already
explained previously, the Hungarian factory of Company X, is facing high percentages of scrap, and
this was the reason why this specific indicator was chosen. This indicator considers the reduction
associated with scrap costs made in the Kovomo line since this was the line tackled in this dissertation
work. This cost only considered the reduction in a number of parts that went to scrap, in other words,
material that was wasted.
70
This indicator was used until the tool developed in this dissertation wasn´t ready. The increase of
savings in each line was due to work developed with teams from Company X and Kaizen. One of the
principle projects developed was the definition of a structured method to solve quality problems in the
lines, as I explained in Chapter 5. There were several iterations made, and the final version is the one
presented in Chapter 5. From the graph in the Figure below the impact of having a structured way to
solve quality problems becomes clear. Just by defining a method to tackle this situation, the costs
associated with scrap decreased.
In this indicator, only the reduction in costs made with the reduction of parts that were considered as
scrap was taken into consideration. From this point on, the new tool will present a more detailed and
accurate way to track Non-Quality Costs.
Figure 40-Scrap Cost Saving
6.1.3 Personal Cost Saving
This indicator is mostly based on the Productivity work package. Since the begging of the project, a
crucial work has been done in several lines that were identified as critical. In the case of the Kovomo
line, the production line tackled in this dissertation, before beginning to work on the scrap, the
productivity had to be improved. A new line design had to be implemented in order to guarantee that
the demand is fulfilled every day. The operator´s work had to be balanced in order to guarantee that
every operator has the same amount of work.
One crucial change in terms of productivity, but also for quality issues, was to create a Mura Station.
Mura station stands for variability and the goal of this change is to concentrate all the processes that
bring high variability to the line in only one place.
117 116
103112
9081 80
0
20
40
60
80
100
120
140
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
AVG2017 Q4
2018/01 2018/02 2018/03 2018/04 2018/05 2018/06 2018/07 2018/08 2018/09 2018/10 2018/11 2018/12
Co
st o
f Sc
rap
pe
r P
iece
Pro
du
ctiv
ity
(pie
ces)
Months
Scrap/pc (HUF) Prod (qtty)
71
In the Kovomo´s case, the Shaping workstation was taken from the production line and a place and
operators were established that would only focus on this task. With this change, we can guarantee that
all parts that leave that station to the Leak Testing machine are 100%.
For the calculation of this indicator the following formula was used:
𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 𝑆𝑎𝑣𝑖𝑛𝑔 = ∆(𝑁º𝑂𝑝𝑒𝑟𝑎𝑡𝑜𝑟𝑠) ∗ 𝑁º𝑆ℎ𝑖𝑓𝑡𝑠 ∗ 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑊𝑜𝑟𝑘 ∗ 𝑊𝑎𝑔𝑒 (3)
Figure 41-Personal Saving Cost
6.2 Chapter Conclusions
In Chapter 6 the indicators used in the project developed with Company X were explained and
presented, describing the benefits tracking that was made during the development of the present
dissertation work.
In Section 6.1 the main KPIs of the project was presented, with the needs and concerns of Company X
in mind: Overall Savings, Scrap Cost Savings and Personal Cost Savings.
In the following section, the evolution of the KPIs was presented, as well as its explanation and result
interpretation. The principal results obtained were:
• An accumulated value of 264,480€ in what Overall Savings is concerned
• An accumulated value of 14,625€ in Scrap Cost Savings
• An accumulated value of 27,600€ in Personal Cost Savings
4 600 €
27 600 € 27 600 € 27 600 €
46 000 €
66 700 €
74 750 € 74 750 €
77 050 €
103 500 € 103 500 €
0
20000
40000
60000
80000
100000
1 2 3 4 5 6 7 8 9 10 11 12
€
Months
501 E 497A KoVOMo 497 F Target Monthly Saving
72
Despite these values, with this dissertation, a new KPI has been developed that from now on should be
the indicator to track. The costing tool should be applied to all production lines in Company X, an actual
cost of quality should be established, and this is the value that should be tracked on a daily basis. This
new indicator is the most important output of this dissertation work.
The new indicator was applied to one production line, which serves as a pilot for all the other lines.
These are the values, calculated with the newly developed tool, for the Kovomo:
• Cost of one Piece to be produced: 4.80€
• Cost per Production Process:
o Cutting: 1.06€
o Bending: 0.08€
o Welding: 0.11€
o Manual Assembly 1: 0.03€
o Calibration: 0.02€
o Brazing: 1.95€
o Visual Check: 0.02€
o Rework: 0.36
o Shaping: 0.05€
o Leakage Test: 0.15€
o Quality Control: 0.05€
o Packaging: 0.42€
Once again, it is important to state that these values are not real, due to confidential reasons.
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7 Final Conclusions
This dissertation work focused on the development of a quality costing model that would take into
consideration all the parameters that in fact affect this type of costs. Since the beginning of the project,
it was clear that that the method used until then wasn´t adequate and it didn´t reflect the reality of the
factory. The factory was losing money, and top management didn’t even understand where all the
losses came from.
With this in mind, this dissertation focused on the development of this model, so that from this day on a
clear picture of each production process is possible. There is now the possibility to evaluate each
production process, not only considering all the costs that are incurred, but also to look within a
production process, and analyze each step of the cycle. Until now, there wasn´t any tool that allowed
this type of visibility, and the quality costs were purely based on the Scrap cost, material that due to
defects had to be wasted.
As explained, this dissertation focused on the development of the concept of this new quality costing
model, in the future this model, that now it´s an excel, should be developed with an IT team, in order to
make this process more automatic and easier for any user.
Another important contribution of this work is a step by step manual, that provides a structured method
for problem-solving. All the steps are explained in detail, and a pilot line was used, to show not only the
costing model working but also how should this methodology for solving problem work. As it was seen
in Chapter 4 and 5, there was a step by step procedure that was followed in order to do a proper
characterization of the production process, identify what are the root causes of the defect originated
and where are this defects originated in the production process. This part is the difficult one when this
types of projects are being developed, there is always a struggle to identify the real root cause of the
problem. With this manual and the correct tools, it is guaranteed that the real causes are identified.
From here, an engineering and maintenance team should be gathered to come with the ideal solution
for the cause identified. In this particular case, standardization of the processes may be required and
implementation of quality systems, known as poka-yoke, should be implemented, in order to guarantee
that once a piece finishes a step in the production process, it only proceeds to the next step if 100%
quality is guaranteed. The quality costing model should be incorporated in this structured method that
is proposed.
For the future, the goal is that Company X starts using this quality costing model, in every production
line, in every factory in the world. This quantification should represent a new indicator that should be
followed by the top management on every meeting that is made to discuss results. Each line should
have visual what´s the cost per piece produced, and what are the costs when defects are produced.
74
The final objective of this new indicator, it to not only bring visibility to the processes, but also to show
the importance of constantly improving the system, in order to reduce costs, and also it allows to track
the benefits and savings that are being achieved with the projects that will be developed in the future.
The work developed in this dissertation, although it was made in the automotive industry, it can be
applied to all kinds of industries. There are many factories that are not considering the rework costs in
the costs of their products, so this quantification model could be applied to evidence the costs that are
being incurred and show the importance of the importance of eliminating non-added-value activities in
the line.
75
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Attachments
Attachment A – Ishikawa Diagram
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81
Attachment B – Step by Step Procedure, applied to Kovomo
